Article by listed accountant: Rakhi Popat
During this month, we have assisted many small businesses in their applications to secure funding. While institutions have funding available, they also have a set of stringent conditions which must be met in order for your application to be approved. Whether one is securing finance from a bank or other institution, one trend stood out to us, and that is the requirement to submit your businesses’ management accounts.
Management accounts can be defined as set of summarized accounting data (balance sheet, cash flow, and income statement) prepared and presented (usually every month, fortnight, or week) specifically for a firm’s management. The objective of management accounts is to provide timely and key financial and statistical information required by managers to make day to day and short-term decisions.
So what are the benefits of management accounts:
The frequency at which each business prepares management accounts will differ, however most businesses will produce management accounts on a monthly basis. This will allow you access to up to date information on key performance indicators which will be beneficial when making key decisions
By having information on your business in real time you will be better equipped to make decisions as and when they are needed, rather than a few months later when opportunities may have been missed.
Whether you are securing finance from an investor or a banking institution, having up to date management accounts prepared on a regular basis will provide such investors and lenders with a level of confidence in both you as a business owner and your business. Up to date management accounts indicates that the business owner has a level of control and understanding over their business.
A regular review of the financial performance of the business will increase the possibility of detecting fraud or other malpractices. The longer the time gap between financial reviews will allow for wrong doings to remain hidden and more difficult to uncover.
By preparing and analyzing your management accounts on a regular basis you will be in a position to identify relevant trends. This will be achieved by reviewing the monthly results against your projections and budgets to identify actual trading performance against your expectations.
As you will be reviewing results on a monthly basis you will be in a position to identify issues such as decreasing sales or increasing costs. By highlighting such trends you can identify the causes and put corrective measures in place.
For management accounts to be effective they should take into consideration both the cash inflows and outflows of your business. Understanding how much cash is in your bank, what is due to come in and what is required to meet outflows is vital to the survival and success of any business. Keeping these details up to date will ensure you do not commit to unnecessary purchases which could put a strain on your cash flow; or alternatively if you have excess cash available you may be in a position to take advantages of discounts offered by suppliers when purchasing in bulk.
During the process of preparing management accounts many queries will be identified and resolved. If this were not the case, at year end in addition to accounting for twelve month’s work, all queries during the period will need to be addressed at the same time.Resolution of issues will take longer and cost more