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Unlike statutory accounts, that have a preparation window of 9 months before submission to Companies House, management accounts take up-to-date business information and use this to produce meaningful reports and illustrate key performance data. For growing companies this can be invaluable.
As a business it can be tempting to focus on gross profit (the difference between sales and purchases) as a measure of performance. Whilst extremely important, this does not take into account other accounting concepts like depreciation, amortisation and accruals. Consequently businesses can end up with very different results than expected.
Management accounts allow businesses to respond to difficulties as they arise; proactively identifying issues and suggesting solutions.
Other examples of management information that can be included in management accounts to assist the directors in managing the business include, revenue and gross profit by client, revenue by client type, product line or salesperson.
Giving managers and staff clearly defined performance objectives can increase motivation and ‘buy-in' to the company. Incentives and bonuses can also be set around achieving certain levels of output, economy or profit.
Ensuring the business remains liquid is crucial to long-term success. Too often start-ups and other companies fail due simply to inadequate cash-flow management. Wages, tax bills and other liabilities, if not properly budgeted for, can decrease working capital and cause difficulties in an otherwise profitable business model. Having management accounts in place allows for better control in this area.
Producing and monitoring monthly reports on monies owed by customers is an effective means of improving debt collection and cash-flow.
Loans, finance and credit applications
Banks and lenders may require up to date accounts and future projections of your company's performance in order for you to obtain credit or finance. Again, they may not be satisfied with seeing statutory financial statements particularly if they are several months out of date. Similarly, suppliers sometimes look for evidence of strong financial performance in order to manage their own exposure to risk. Having good, up-to-date management accounts available can be a useful reassurance.
For tax reasons, some business owners elect to be paid in dividends rather than a salary. The amount that can be paid in dividends will be determined by the amount of distributable reserves available in the business. The difficulty with this situation is that without management accounts, companies need to rely on historical information contained in the accounts and are likely to under or overestimate the reserves figure.
Selling the business
Should you wish to sell your business, investors may wish to see management accounts. This can provide a useful tool for valuation purposes.
Some jurisdictions such as the British Virgin Islands or the Seychelles do not have statutory requirements to submit annual accounts. They do however require adequate accounting records to be kept. Having management accounts in place fulfils this requirement.
How can Jordans help?
We can provide management accounts packs to your business on a 6-month, 3-month or monthly basis, as well as commentary and analysis to help your business move forward. This would be tailored to the specific needs of your business and the nature of your industry. If you would like to find out more about what Jordans can do for your business, please get in touch.