Why Management Accounts Are Essential to Your Business (BN5)
I have often been asked why we need to provide management accounts and why they are so essential to the health of the business. Let me put this in context; 99% of the top 100 FTSE companies are provided with an accurate and meaningful set of management accounts on which to base their decisions, whereas most failing businesses either do not have management accounts or do not use them to help them make sensible decisions.
Financial accounts are of course a legal requirement for all businesses where as
Management accounts are not a legal requirement. This is strange as they are in many ways part of the business brain and a valuable tool for managing your business effectively.
Perhaps we should start off with the question why do we need management accounts,
as by answering the why - we will be able to understand how to produce them –and how to use them effectively?
So at one extreme there are people that guess and work on gut feeling only; and whilst this type of management can enjoy short term success, many of us would refer to this type of management as gambling.
Fellow directors, investors and staff tend to be shy when it comes to funding gamblers; even when the previous horse proved to be a winner.
Conversely; management teams that are afforded regular management accountancy meetings, meetings complete with an accurate and meaningful set of management accounts, are more likely to enjoy the type of confidence and trust that are the foundations of profitability and business growth.
In short successful businesses need accurate, relevant and meaningful management accounts on which to base their decisions.
The benefits of using management accounts are numerous and in no particular order these include:
Factual Data on which to base management decisions.
Surely; it is better to decide whether to continue on a particular path; without the fog and noise of business life to cloud ones judgement. Management accounts can add clarity and a sense of calm and of course factual data rather than a simple belief.
And by understanding what makes the business money versus what loses the business money; it’s easier to modify or make the decisions that lead to higher productivity.
People are the greatest asset within a business. If the team sees great decisions being made (based on great information) then they will generally do a better job than those frustrated by bad decisions.
Lower Interest Rates
Lenders such as banks and factoring companies will generally set their interest rates based on their confidence in your ability to repay monies lent. If they suspect that the directors make decisions based on questionable data, they will either not lend or impose higher interest rates.
Conversely, I have witnessed one client reduce his bank fees by tens of thousands of pounds; simply by sharing the firm’s management accounts with the bank manager.
Advantageous supplier terms
And suppliers will be far more likely to offer favourable credit terms and lower prices to a well managed business than one that gambles on its fortunes.
Major customers that seek to place big orders are often interested in the financial health of the business, and will often request financials from potential suppliers. Sharing elements from ones management accounts can sometimes prove advantageous.
Chartered Accountant Relationship
Businesses that provide a full suite of management accounts to their chartered accountants are more likely to benefit from the high level of business and expert taxation advice rather than wasting the relationship on routine data checks.
Management accounts are an effective way to communicate to the Investors, who are more likely to lend and continue to lend based on their confidence in the management team’s management of the business.
If you do not have reliable, timely and meaningful management accounts, the likelihood is that you are missing out on valuable business opportunities.
If this the case please watch the rest of the videos as I will be providing you with some tips and advice to start incorporating management accounts into your business
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