It is essential to monitor the right metrics so you know how the business is doing and can make adjustments as appropriate.
There is no legal requirement for a company to produce Management Accounts on a regular basis but waiting for the Annual Accounts is too late if you want to make the ongoing adjustments necessary to improve productivity.
The frequency, quality and type of information they contain is therefore crucial.
Ideally, Management Accounts should be produced monthly and should contain an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.
The Balance Sheet shows the company’s assets and liabilities and how much money the business owes to suppliers at any one point in time as well as how much money it has in the bank. Central to this is the cashflow, which needs to be well-managed.
The Profit and Loss (P&L) statement ought to report both monthly and year to date figures. Overall it is a measure of the business’ health although some companies make profits but poor cash flow by not getting paid. The P&L can also be used for much more by reporting sales by market or product sector and their associated cost of those sales and direct costs to monitor margins. It might also group overheads into logical cost areas. so you can monitor the fixed cost elements of your business.
Maintaining a spreadsheet of the monthly P&L is also useful to show trends and monitor the success of marketing initiatives. This spreadsheet in particular is a key tool for establishing a culture of continuous productivity improvement.
The Trial Balance is a useful reference for looking behind the numbers. Essentially all entries in the accounts are allocated to a Nominal Code where the Trial Balance is a list of all the Nominal Codes with a value of all entries against that code. The Balance Sheet and P&L consolidated the values for a number of codes to produce a meaningful report. As an example there may be several different sales codes where the P&L may report only one. I use this example as I have suggested earlier that the P&L report several sales codes since it is easier to monitor the P&L than the Trial Balance.
Another aspect of the Trial Balance is to monitor errors in the accounts since it relies on the double-entry accounting system. If the total debits equal the total credits, the Trial Balance is considered to be balanced.
The Aged Debtors and Aged Creditors are also useful. While I suggest a summary schedule is used to avoid having too many pages of information, the detail reports by customer/ supplier show the individual sales and purchase invoices so you can monitor which ones are outstanding.
The Management Accounts can be a great source of management information but need engagement with your accountant or accounts controller to set up the reports in the first place. If you have the right information you can make the right decisions, it’s all about having the right ingredients.