6 Reasons to Review your Management Accounts

If you want to grow as a business, at some point you need to start reviewing management accounts. You can start quarterly, but you need to work towards doing this monthly.

Before we get to our 6 reasons, let’s talk about which reports to look at. Depending on the complexity of your business, you should be checking:

  • The Statement of Financial Performance – AKA the Profit and Loss report (P&L) or the Income Statement – tells you how your business is performing over a period of time. It shows the revenue your business has generated, less the expenses for that same period. In other words, it shows how profitable your business is.
  • The Statement of Financial Position – AKA the Balance Sheet – shows the value of the business’s Assets, Liabilities and Equity.
    • Assets include money in bank accounts, Plant and Equipment, Accounts Receivable balances etc.
    • Liabilities include Bank loans and credit cards, Accounts Payable, and Hire Purchase balances.
    • Equity is the difference between your Assets and your Liabilities and includes Retained Earnings and Owner Funds Introduced.
  • Accounts Receivable Ageing report (Aged Receivables) – this shows how much money is still owed to the business as at a certain date in time. It is usually segmented as to how overdue payments are, or sometimes by how far past the invoice date they are. Generally, you will have Current, 30, 60 and 90 days columns.
  • Accounts Payable Ageing Report (Aged Payables) – this report shows who the business owes money to as at a certain date in time and, like the Accounts Receivable Ageing report, is usually organised by overdue period.

So why will looking at this stuff help me??

  1. Understand your business better – looking at your Profit and Loss report monthly shows a clearer picture of how your business is performing month by month and gives a better understanding of what makes up your profit. It can be helpful to compare periods, or to look at a month by month P&L, to clearly see the revenue and expenses month by month. This helps to identify trends and to highlight anomalies in coding/categorising.
  2. Accurate information for lending purposes – If you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet. If you are unsure of your balances in some accounts, get in touch and PennyBooks can explain them further.
  3. Get paid quicker and reduce bad debts – looking at your Accounts Receivable Aged Summary each month assists following up overdue accounts promptly – resulting in getting paid quicker! The longer an overdue amount is left unpaid the higher the risk of it not being paid at all, so it is important to keep on top of this.
  4. Better relationships with your suppliers – assuming you’re entering supplier bills into your accounting software, your Aged Payables report will alert you of unpaid or overdue amounts. Supplier relationships are an important aspect of business and paying on time is vital to maintaining those relationships.
  5. Better cash flow – understanding much money the business is owed, and how much money the business owes, helps to ensure that there is enough money when needed. Understanding the trends of your business, its profitability drivers, its expenses, etc., will help to plan sales and marketing campaigns so that the revenue keeps coming in.
  6. Better business decision making – financial reports tell the story of your business, so it’s important that you understand what they are telling you. The better you understand your reports, the stronger your position to make business decisions affecting the profitability of your business and its financial viability.

If you want to know which reports are relevant to you, and how to better understand them, then get in touch with PennyBooks today.

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James Watson