When setting out on a car journey you need a destination, map, and ought to check the traffic and weather reports, so you can choose the optimal route. You also need to have enough fuel and money to buy more if needed. Indeed, there are many aspects of the planning that are taken for granted for regular trips that you will think about for a holiday or long journey.
Along the way, you will check where you are on the map, monitor traffic and weather conditions and make changes accordingly. You will also monitor your fuel and refuel as necessary. You might even monitor fuel efficiency and adjust your speed to reduce consumption.
This analogy can be applied to running a business. It can be difficult enough to keep a business on track to meet its goals and forecasts, even without the external effects of ups and downs in the economy and, currently, the uncertainty being caused by the ongoing Brexit negotiations.
Therefore, a business needs to be able to assess at regular intervals how it is performing as well as being able to spot early warning signs that something may be going wrong or veering off track. This is where monthly Management Accounts are so useful.
The components of monthly Management Accounts, as outlined in our blog of February 13, 2018, would ideally include an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.
These are the business equivalents that allow you to check where you are on your route map. They provide an indication of the state of your business, its continued health and its ability to reach its destination as defined by the goals you set and forecasts you prepared as part of your planning.
The Balance Sheet, for example, shows the company’s assets and liabilities and more importantly how much money is has in the bank, how much is due and how much is owed to suppliers and others such as HMRC. These are key to monitoring short-term cashflow, which needs to be well-managed if the company is to avoid running out of funds.
Regular Management Accounts are your early warning system
Ideally Management Accounts should be reviewed monthly, or at the very least quarterly.
They will tell you how well sales and margins are doing and how they compare with forecasts and targets. Organising them to provide detail can allow you to see performance by product line or by market segment, even by customer if you have some large accounts. You can also monitor costs which can also be reported in detail so in turn margins and profit contribution by product line or market segment can be monitored.
The information will allow you to adjust the business goals and forecasts as appropriate. If costs are rising, it may be time to review which suppliers you use, perhaps also staff overheads.
You might also monitor the cost of repairing and maintaining machinery or equipment and use this to assess when it should be replaced,
If there are financial anomalies, they may indicate fraud or other malpractices that need to be investigated and dealt with.
Above all, a regular review of Management Accounts will allow you to stay in control of your business and provide you with the information to make early decisions that move it forward in the best way possible.