Management Accounts & Why Do I Need Them?

I’ve recently been working with clients where we’ve been focusing on the financials. After working with a client to help them make some significant improvements to the management of their financial numbers, the client said something that surprised me.  They said… ‘I feel so stupid for not know about my financials’.

I had to think about that one.  But why would they necessarily know much about what financial management they need?  They’ve not had training in it.  When I first started in business for myself I didn’t really know about budgeting and cashflow…. I had produced departmental budgets in my career and learnt that there’re was sometimes ‘too much month for the money’, as Jim Rohn said.

But I didn’t really know how to work it all out;  So I learnt!  I learnt from others who did know and from a brilliant book – Financial Intelligence: ‘A Manager’s Guide to Knowing What the Numbers Really Mean’ by Karen Berman, Joe Knight & John Case.

So it’s not about being stupid, it’s about learning all the things you need to do when running a successful business.  And there’s lots to learn.

So, let’s have a look at why you need to know your numbers…

I heard a quote many years ago that 93% of businesses that failed were in profit; and it’s still true today that around 90% of businesses that fail, do so because they ran out of money.

“If you don’t look after your numbers, your business won’t look after you”.

So, how do you build a system that shows you what is going on and what is coming up so that you are in control of your business?

One of the most important activities, if not the most important, is to run management accounts.

Management accounts comprise of:

  • A realistic, forward looking, 3 year budget that you capture actuals against.
  • A Cashflow forecast of where and when the money flows into and out of the business.
  • A monthly P&L and Balance Sheet

The 3 year budget needs to show your anticipated sales by month and the costs associated with making those sales, these are your variable costs. This gives you a gross profit.  From the gross profit you take away your fixed costs and this is your net profit. Note: this is before interest on any borrowing, tax, depreciation and amortisation.

The important part is to be realistic on what can be achieved and keep an eye on your maximum capacity – you should plan for extra resources as the business grows beyond the current capacity.

Cashflow forecasting is about understanding what cash is available to the business and when.  You may have just made a great sale, but until the money is in your hands, you have to fund the business with the money you have right now.

By building a weekly cashflow over the forthcoming year, you can see when the income and outgoings actually occur and check that the business can cover all the outgoings.

The Monthly Profit & Loss (P&L) and the Balance Sheet show you an overview of how the business performed against your targets.  This data will show you if you are on track with your plans or if you need to change something to hit your targets.

It’s all about being in control… And if you are like me, I want to control my business rather than it control me.

If you would like to learn more about how to implement a practical approach to managing your numbers, email alex@alexpetty.biz

About alexpettybiz

We educate and inspire business owners to realise the potential in themselves and their business. The way we do it is to help make businesses easier to run, more profitable and more fun. We believe in coaching at every opportunity to help business owners succeed. What can we do for you?
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