Why Management Accounting Is Important for Decision Making
June 25, 2020
The preparation of Management Accounts will provide a valuable tool on which the business owners can manage the business. Informed decisions can be made based upon objective data, and appropriate actions promptly implemented to enable the business to succeed.
Management Accounts allow the business owners to control their business, merely checking the bank balance periodically does not constitute reasonable Financial control.
Producing regular Management Accounts will provide the basis for understanding the performance of the business, reporting Key performance indicators (KPI's) together with standard financial reports. KPI's are an invaluable tool if reported regularly and on time.
What are the Management Accounts?
Management Accounts are a set of financial statements, prepared periodically, e.g. monthly, allowing the business owners or directors to understand the financial trading position of the business and make decisions based on the data. These are usually compared against budgets and typically would include a profit and loss account, balance sheet, cash flow statement, and a short report with KPI's.
Why should a company prepare Management Accounts?
The work may be considered an unwanted administrative chore or only a cost and another source of cash outflow from the business. While some administration work is required, the preparation of management accounts is work that should allow informed decisions to be made throughout the year, leading to improved performance and shaping business decisions for the future.
What are the benefits of preparing and using Management Accounts?
Business Control - A healthy bank balance may not always indicate a successful company. The cash balance is taken at one point in time and could, in the future, be adversely impacted by current trading conditions. Unless the business owner can immediately identify adverse operating trends and take action to correct the situation, it may result in a severe cash flow shortfall later. Management Accounts should provide sufficient information to detect positive and adverse trends in sales volumes, operating margins, costs, and profit. Importantly this information will be available throughout the trading year and allow for informed business decisions to be taken.
Focus on the key business areas
Sales - Knowing at year-end that sales may have increased or decreased in total against the previous period may be of interest, but is it sufficient to exercise control over crucial areas of the business? As part of the Management Accounts work, an analysis of sales, by product, is presented. This information will allow the business owner to review objective data on product sales trends and to make informed decisions on divestment or investment in different product lines. Bringing all these together will create a centralised repository of data and expertise within your business that can be utilised, not only with the continuity planning but through the ordinary business operations.
Costs - The total business costs are of little value when managing a business. Analysis of costs across the business is critical. A business owner/director should know where the company is spending money, and if costs are spiraling out of control.
Tax Planning and Dividend Payments - When up to date information is available, a director/owner can plan when transactions can be undertaken with greater confidence. This approach may be helpful in legitimately reducing the tax liability of the company, and to maximise the potential benefits by payment of dividends as opposed to salary.
Demonstrate the Owner is in Control - Knowledge is power. Indeed, if the owner can demonstrate to the professional people the business has contact with, that there is a comprehensive understanding of what is happening within the business, then respect will be gained. This understanding is essential in the relationship with the bank manager or other external parties.
Reduced Year End Audit and Accounting Costs - During the process of preparing Management Accounts, any queries identified are addressed and resolved. If this were not the case, at year-end in all queries would need resolving together with accounting for twelve month's work. Memories will fade, and the resolution of issues will take longer and cost more.
Detection of Fraud - A regular review of the financial performance of the business will increase the possibility of detecting fraud or other malpractices. Naturally, the more extended time gap between financial reviews will allow the potential of fraud to remain hidden and more challenging to uncover.