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Management information gives business owners the information they need to make decisions. With accurate, timely information, management can make informed decisions about operational items such as cutting costs, increasing production time, increasing on-hand stocks or adjusting marketing budgets, for example.
From an accounting perspective, business owners use management accounting to track, record and report financial information for managerial review. Quite often smaller businesses will overlook the importance of having good management accounts throughout the year and only focus on making sure compliance is adhered to at the year end. It is understandable why this is happens, particularly for small owner managed businesses where owners find themselves tied up in the day-to-day running of the business.
If you wait until the year end accounts are prepared to find out how your business has performed, you are missing out on tax planning opportunities, how much tax you should provide for, and lots of other useful information that can be extracted from good management accounts. If you only review your accounts once a year, your decisions will only ever be reactive, as opposed to the good proactive decisions you may have been able to make with timely, monthly management accounts.
Good management information will allow business owners and managers:
Reviewing management accounts frequently allows business owners to keep an eye on margins and overheads and to take corrective action where necessary. You may review your gross profit margin trend and see how that can be improved by thinking about how efficiencies and wastage can be improved or what room there may be for price adjustments. It’s easy to think that if the tills are ringing, the business is profitable, but that’s not always the case. Budgeting will also form part of a good system so that you can continually compare actual versus budget.
Once you have a profit and loss account and balance sheet, it’s amazing how many financial ratios you can calculate and monitor in order to improve results. Profitability ratios measure the company’s use of its assets and control of its expenses to generate an acceptable rate of return. This includes things like gross profit margin, net profit margin and return on capital employed. Liquidity ratios measure the availability of cash to pay debt. These are typically current ratio and quick ratio. Activity ratios measure the effectiveness of the firm’s use of resources. Debtor days, creditor days (how long your customers take to pay and how long you take to pay your suppliers) and stock turnover are useful ratios. Market ratios are concerned with the return on investment for shareholders. These include things like earnings per share and dividend yield.
In order to maximize tax allowances and reliefs for you and your business, it is important to consider your options well in advance of the year end or an investment decision. You are much more likely to increase your allowances and reliefs by reviewing your position prior to the year end. Capital allowances on plant & machinery expenditure is a good example. Getting the timing of such purchases can be the difference between getting 18% and 100% relief in the year of purchase.
This is particularly important when trading through a limited company. It is common for shareholders to take a small salary and extract the remainder of the profits they wish to take via dividends. In order to do interim dividends, you will need to know how much profit is available to distribute. If it transpires when the year end accounts are drafted that dividends have been declared over and above the profits available, the dividends are deemed to be illegal and creditors may request they are repaid (you have taken funds that may otherwise have been used to repay creditors).
Banks and other providers of finance will always want to see quality management information in order to consider your current facilities and review any requests for further finance or re-financing. Having good management information to hand adds credibility to your business and improves your chances of securing the finance.
All of the above will combine to save your business money and improve cash flow. It will also help to give you a competitive edge, particularly when it comes to looking at your margins and pricing in a more proactive way.
Most accounting software will allow you to produce some really good reports at the click of a button, but you also need to consider doing some further analysis, like the ratios and key performance indicators (KPI’s) and discussing tax planning with your accountant. You may want to do the bulk of it in house and just have a chat with your accountant on a regular basis about the results, or you may want to outsource the preparation of the management accounts to your accountant.
Armstrong Watson have a team of specialists who are Sage 50 experts and accredited gold partners for cloud based Xero software ensuring that whatever your needs, we can meet them. Contact Armstrong Watson to discuss how we can implement or improve a good management accounting system for your business.
Richard Askew, Corporate Director
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