Accountants

How Detailed do Management Accounts Need to Be?

It is generally accepted that management accounts are a good source of information to assess the performance of a business, and small business accountants will be pivotal to this. But how detailed does this need to be, and how frequent? How do I get the best management reporting from small business accountants near me? This blog aims to address some of these questions for the small business.

Reporting tends to change organically over time, but sometimes it is a good idea to think about the necessary structure when we first start doing it as it reduces the frequency of rework. For a small, local business that is just starting out, there will only be a handful of items on the balance sheet; a couple of bank accounts, some hardware and software, shares issued, and perhaps some loans that initially provided the funding for the business. Generally, it will be more important for a new business to think about their profit and loss at this phase of the business life cycle as this is going to directly have an impact on the long term financial health of the business.

Small-Business-Accountant

Income

The profit and loss account can generally be considered in two distinct sections; revenues and expenses. Revenues are sales and services made to your customers. So how detailed do these need to be? If the business is product based, for example, selling flowers at a florist, then you will want to know which flowers are selling better than others. You may find that some flowers sell well all your round, some are seasonal, and some not at all. If a business is service based, then you will want to know which services are driving the business. For example, a business could be providing website design, which can sometimes be considered as a one-time service as once the website is set-up the proprietor can maintain it themselves, and the customer is gone. The provision of website maintenance and security could prove to be the service that maintains long term business from the customer. You could also consider revenue at a customer level. Who are your returning customers? Which customer is less sensitive to price? And how often do they come back? It is therefore important that revenues need to be detailed enough so that small businesses can think about the products and services that are contributing to the business. More on this later.

Expenses

Another important area to consider is expenses. This can range from costs relating to the manufacturing of products to the paying of salaries and rent. The broad range of expenses means that reporting can potentially get very detailed here. Therefore, it is wise to consider aggregating them using common categories, for example, light and heat, rent and rates, social security costs, legal and professional. It is also possible to think about these costs at a supplier level. The benefits of doing this allow you to think about whether you are getting good value for money from the supplier through trend analysis, especially if you are getting a preferential first-year rate. When costs are considered over a longer time span, it may show that costs are slowly rising. You could then consider getting other suppliers to quote for the same service to keep costs low.

Key Performance Indicators

We mentioned earlier that a small business should consider and monitor the products and services that contribute to the business. If you are keeping a good track of both revenue and expense, then you can start to think about your profit margin, which is a metric used to gauge how well a product or service is doing. Thinking about your profit margins will allow you to focus your efforts into specific areas of the business. You can try and increase your market share on the areas with the strongest sales and drop the poorly performing ones, or you can market aggressively to turn the poorly performing areas around. Either way, the record keeping has allowed you to make those informed decisions.

Frequency

So how regularly do these management accounts need to be? There’s no right answer to this! Simply select the frequency with which you would be most comfortable with. Most companies will opt for monthly management reporting, with more detailed analysis on a quarter by quarter basis. However, a small business trying to grow will often want to think about their cash flow. This means that the regular monitoring of bank balances and cash flow forecasts are in order. In this instance, a daily reporting regime would be suitable.

We recommend speaking to a local, small business accountant to ensure that your revenues and expenses are structured and maintained in a way that suits your business needs. Normally, this is done through the use of bespoke accounting software, which they are going to be well versed in using. For small businesses starting up, we recommend sitting down with your accountant and consider the various revenue and expense categories that you would find useful for regular performance reporting.

As you can see there are many things to consider when thinking about the performance of your business. Contact your small business accountant for more information!

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