If you watch programmes like Dragons Den or The Apprentice then you will have noticed that, without fail, when the entrepreneurs or candidates are getting grilled, the number one question is 'What are your profits this year?'. Woe betide anyone who replies 'I'm afraid we don't have that information' because they will be torn to shreds! Management Accounts, as any good Dragon knows, is the difference between being in control of your business or trading with your fingers crossed.
Most high street accountants don't really offer this service or, if they do, sometimes as an afterthought. Here at Visionary Accountants in St Albans, we are, first and foremost, a firm of Management Accountants; so it is built into our DNA. We love Management Accounts and using them for the performance management of our clients’ businesses. Nothing gives us a bigger buzz than helping our clients grow their succes and achieve their goals.
Do you recognise this picture...
Can you identify with some of these statements?
“We have basic ‘bookkeeping’ done in-house by some admin staff who had a bit of spare time.”
“No monthly information is produced and there is no direct management of the finance function in place.”
“Our Accountants appear several months after year-end and cobble together statutory accounts to file just before deadlines. Management neither read nor understand these accounts.”
This is what we describe as failing to plan or the 'extinction scenario'! But it doesn't have to be this way.
If your local accountant isn’t supporting you by providing Management Accounts – Contact Us. Or, if you would like to find out a bit more about what your business is missing, read on...
What are Management Accounts?
We know that entrepreneurs and business owners are ridiculously busy people, so our mantra is to keep things simple. These 3 one-page reports are specifically designed to give a mission-critical overview of your business performance without bogging you down in detail and jargon. We work with you to design and build the reports that highlight the key areas of relevance to your business because – if you measure it, you can manage it.
The Holy Trinity
1. Profit and Loss Report:
This is a summary of the total flow of income and expenditure as incurred during a fixed period of time.
Good quality Management Accounts will show you an itemised Profit and Loss (P&L) report every month. There will be a year-to-date total which can be compared against the same period last year and the forecast budget your are trying to achieve, along with variance analysis.
The P&L will show your sales, cost of sales and other direct expenses to give you a Gross Profit (GP) figure. It will then list your main overheads line by line; rent, rates, gross wages, office costs etc, to arrive at an operating profit (hopefully!). Your main overheads will be fairly fixed so if your GP is not enough to cover your overheads and create a profit some decisions need to be made.
You can work to increase your sales or reduce your cost of sales or reduce your overheads or a combination of these. Are your prices right? Do you need to find cheaper suppliers? Do you need to reduce or increase your employee headcount?
There will also be an estimate of your Corporation Tax bill that is accruing along the way. You then have the opportunity to set aside some of your cash to cover this future liability and avoid any shocks.
This will also guide you as to the level of post-tax profits available for drawing as dividends so that you don't overdraw during the year.
The final Profit After Tax figure from the P&L report will be transferred and show at the top of the Cash Flow Report.
2. Cash Flow Report:
This is a summary of the net movement of money into and out of a business over a fixed period of time.
The cash flow report explains the relationship between profit and cash in the bank. Starting with Profit After Tax from the P&L, we then add back non-cash items, like depreciation, and adjust for movements in your working capital (debtors, creditors, stock, taxation etc) to show the cash movement from operating activities. We then calculate net cash from investing and financing activities (capital expenditure or debt movements etc) to arrive at a reconciliation between the profit in the month and the cash movement in the month.
If you've ever felt that you're making good profits but your cash is always under pressure, this will explain why. Maybe you have invested in some machinery which is paid out of cash but isn't reflected fully in the P&L (except as depreciation) or maybe you have taken on debt, in which case the monthly repayments won't be fully reflected in your P&L (as only the interest is shown) or perhaps your customers are paying you too slowly and you are paying suppliers too quickly?
Sometimes business owners draw too much money from the business and cause stress to the cash flow. If your drawings aren't based on solid Management Accounts then this is a very real risk.
Once again the cash flow report will guide a plan of action before it is too late. Maybe you need to re-negotiate supplier payment terms or have a focussed drive on collecting your debts quicker or maybe you need a short-term overdraft facility to get through a sticky patch?
The final reconciled cash-at-bank figure is then shown in the Balance Sheet.
3. Balance Sheet Report:
Whilst the P&L report measures flows of income and expenditure, the Balance Sheet (BS) is a snapshot of your assets, liabilities and capital at any specific point in time.
By producing a monthly BS you can keep an eye on things such as cash in bank, your upcoming liabilities - trade creditors, vat, payroll taxes, corporation tax etc - and money that is owed to you from trade and other debtors.
You can use the BS to better plan and manage your cash flow, for example, setting aside funds for large bills or taxes that are coming up soon or improving your credit control function to reduce debtors and convert them into cash. The BS also provides a healthcheck of the position of the business which will be used by banks, credit reference agencies and suppliers to decide on the level of credit risk your business presents. This can affect things such as credit payment terms from suppliers or bank loans or potential investment opportunities.Success Scenario
When you can relate to thefollowing sorts of statements then you have moved from the extinction scenario to the success scenario!
“Data entry and processing for our Sales, Purchase and Nominal ledgers is done by financially qualified staff who understand double-entry bookkeeping.”
“Our accountants manage the systems, processes and outputs of our finance function. They produce a simple monthly reporting pack of management information with a summary page of actionable headlines.”
“Our Accountants regularly review our financial performance during the year so that we know where we are going. We already know what’s going to be in our statutory accounts before they are produced and are well into the next year’s planning.”
The End Goal
What are we trying to achieve with all of this? In a nutshell "a business that can run without you." In the nicest possible way, as a business owner, you are trying to make yourself redundant so that you can work 'on' the business instead of 'in' the business.
Success is a business that:
- generates cash
- has good people, processes & systems
- knows where it’s going
- is easy to understand for a buyer, investor or other stakeholder
Because the end result of this is a more valuable and saleable business.
If you want to stop guessing and start taking control of your business to plan your future success then get in touch today.
James B, Management Accounts client in St Albans said:
“Visionary has executed a first-class delivery of my management accounts and payroll over the last year. The team are friendly, efficient and highly knowledgeable; I would provide a strong recommendation to any business or individual looking for a fantastic service.”
Our Accountants work with numerous local businesses in St Albans, Watford, Welwyn Garden City and beyond, providing meticulously prepared monthly Management Accounts. Could your business benefit from this service?
Our Management Accounts service includes design and build of the tailored reporting pack with your goals in mind, monthly completion of the Management Accounts reporting pack with a one-page report highlighting key areas of note, concern and advice, plus an optional review meeting with one of our friendly management accountants. The review meeting can be monthly, bi-monthly or quarterly to suit your requirements.
And guess what? It doesn’t cost the earth, in fact, the vast majority of the businesses we work with are more profitable because of the Management Accounts services that we provide.
Give your business more vision and call our local Accountants in St Albans today on 01727 730550.