This is a big topic and if you are pretty new to accounts there is a lot to learn.
This post is aimed at small business owners who aren’t accountants but want to engage seriously with their finances. It’s easy to think that management accounts is something you can forget about and just leave to your accountant once a year. This is fine if you are just trying to get by. It’s fine if you are running a ‘lifestyle’ business. But if you want to grow your business you need to understand what is going on.
If you understand your finances then you probably understand your business. If you understand your business you are much more likely to make good decisions that see it grow.
You should prepare management accounts to evaluate the health of your business and review them regularly. Every month is my recommendation.
1. The balance sheet
Don’t worry too much about this. Your balance sheet is a picture of the company’s assets at any single point in time. Small businesses can largely leave this to their accountant. Except for one thing. Cash! I won’t labour this point because you probably know that if you are going to keep an eye on ONE thing you should keep an eye on cashflow.
2. Cashflow statement
Your balance sheet shows you how much cash you currently have in the bank. But what you really need to know is how long this cash will last and how it’s working for you to build the business. You don’t want too little cash but you also don’t want it sat around doing nothing!
I recommend that the central point of your management accounts is your cashflow statement. If you run out of cash you will die. Your management accounts should plot a picture of what you expect to happen over the coming months. It should be sense checked regularly against your bank balance and it should be set out to flag any cashflow issues before they become an emergency.
3. Profit and loss
You should really use one of the great online accounting applications. I’ll write a separate post about them in due course. If you do then this will give you simple tools to manage income and expenditure. It will give you an income and expenditure statement which should form part of your management accounts. This tells you something very different from your balance sheet or cashflow statement. The P&L is useless if your cashflow is not managed well, but if your cashflow IS managed well then the P&L is a better measure of the health of your business. It shows what’s earning you money and what isn’t.
The single best thing you can do is to increase revenue in the areas you are already strong. Your P&L will help you understand where you are strongest. After this you may also be able to save a bit by chopping unnecessary expenses, but this should come second.
Once you have been running for a year or so it’s worth putting together a budget. You may well have no clue what is really going to happen next year but it’s a great discipline to sit down and paint a picture of the next year in figures. It will force you to imagine a potential next year of business and it will inform key decisions about marketing investment, recruitment, capital investment, etc.
Your actuals may quickly break away from your budget but don’t worry. You are build healthy habits and it all adds to your understanding of your business.
5. Monthly reporting
The final ingredient to your management accounts should be monthly reports. This is where, on a month-by-month basis you pull together the other sections of the your management accounts into a simple dashboard which shows you your last month’s performance in the wider context of the business.
Here are details you should include (each pulling in sales, expenses and profit/loss):
- Same month last year – this is a good comparator because it controls for seasonal variations
- Actuals from month just gone
- Budget for month just gone
- Variation against budget for month just gone
- Actual total for year to date
- Budget for year to date
- Variation against budget for year to date
The key to this is getting a good system in place that allows you to collate all this info quickly. A good spreadsheet is key. If you think it would be useful for me to post an example please drop a comment below and if there is demand I’ll pull something generic together to share.
But if you spend the time getting into your figures you really won’t regret it.
A good software package can help you a lot with all this stuff. There are a number of good ones, but to start with check out my review of Clearbooks accounting software, my particular favourite.