For years, I asked myself this question. Management Accounts were always something that accountancy firms I worked at offered, but they were rarely taken up by clients and prospective clients. They just didn’t see any value in them.
But why?
I never really questioned it until I started working more closely with small business owners and began to understand the challenges they face on a regular basis.
So, to explain why management accounts are so useful, I’ll use a gaming analogy. I like to play video games and these actually provide a great analogy for the importance of management accounts… as strange as that may be!
Bear with me…
When you start playing a new game, you need to know what the objective is. Why are you playing the game? This is where goal setting is so useful. Set your goals! Understand the point of the game! Is there an income target you want to achieve, a new product or service you want to develop?
When you understand the objective, you begin working away to achieve that objective. However, it’s not a quick win and eventually you get side tracked along the way with side quests – doing the smaller tasks that can sometimes be fun, sometimes be boring, but ultimately don’t help you progress towards the main objective.
I think we’ve all been there in business!
Suddenly, you’re so bogged down in hundreds of side quests that you can’t remember what the main mission was.
So, after a few wasted hours, you pause the game, visit your list of objectives and remind yourself of the most important thing you need to do in order to get closer to the end goal.
You identify the destination you need to get to and begin to make your way there. However, you need to keep checking your in-game map to make sure you haven’t run off course, until you finally arrive.
Management accounts provide the same functionality.
If you haven’t set business goals, I suggest you do that first, so you know the point of the game. What will your sales be after year 1, 2, 5, etc? How much profit will that generate? How much will you pay yourself?
Once you have your goals set, you can go off on your merry way to achieve them! Just make sure you review your goals against your performance on a regular basis so you can make sure you’re still on the right track and haven’t been side tracked too much. If you realise you have been side tracked, a review of your performance against goals will help focus your mind and pull you back on the right path to achieving your goals.
But more than just a quick progress check:
Management accounts done correctly, can provide so much more for a business owner.
Here are a few questions and comments I hear that can be answered by preparing regular management accounts:
- I’ve had a really good month, what will that do to my tax bill?
- I offer lots of products / services, but don’t know which ones make me the most profit. What should I focus on?
- I’ve just landed a great deal and I think Ill need to take on more staff. What can I afford to pay them and how much profit will be left?
- I’m a new business and don’t know if I should be VAT Registered or not. How will I know? And what will I need to do?
Profit and Loss
Now, I’m not talking about having someone run a Profit and Loss report on your accounting software with a ‘Here you go. See you next month!’. The likelihood is that this won’t mean much to you, and you may not even look at it. The above questions don’t get answered this way. The questions get answered by having someone dig deeper into the numbers. Splitting out different income streams in your accounts so that they can be monitored; comparing month by month variances; tax calculations and forecasting; monitoring actual results against budgets.
Having someone really delve into your numbers and then explain everything to you in a way that you understand is so important to obtaining financial freedom.
Now that you understand how important management accounts are to running a successful business, why don’t you get in touch to discuss further.
Just call on 01604 662670 or email [email protected]