Many small businesses are aware of the importance of keeping business records. Unfortunately, most of them don’t give regular management accounts the importance it deserves. In fact, many will give priority to other records such as financial and cost accounting. Well, this should not be the case. Management accounts are equally as important. Unlike the other accounts (cost and financial), management accounts are based on future predictions. They focus on key performance indicators (KPIs) hence help in the running of a small business. The following are some benefits of management accounts:
Quick Decision Making
One of the main benefits of having management accounts prepared regularly is to improve decision making. Similar to large organisations, a small business will make decisions based on the past, current as well as future performance. The management accounts rely on the available information and future expectations. The management will therefore make their decision based on what the accounts predict. Having the accounts prepared on time quickens the decision making as they will have some hard facts to rely on.
Running a business is all about proper planning. Knowing which departments to concentrate on, which product requires improvement, what policy needs to be implemented, where to invest in future are some of the decisions a business owner and manager need to make. Proper accounts will contain a breakdown of past performances and likely future happening. In fact, the accounts can be used to stimulate future activities. This helps in proper planning of a business so as to match the future expectations.
The success of a business is mainly gauged on its performance. Did it meet the shareholders and stakeholders expectations? Were the set targets achieved? Is it possible to surpass previous performance? All these questions point at future performance based on current market conditions and parameters. This is one area where regular management accounts are of most importance. The accounts comprise of probabilities, time-series analysis, trend analysis and much more. Such market indicators help in gauging and managing the performance of the small business.
Formulation and Implementation of Strategies
Managers as well as the business owner are required to be financially aware of the business position. This is the only way he may come up with strategies that will guide the business now and in the future. Management accounts help in formulating strategies. The people in charge use the key performance indicators (KPIs) to make decisions. The same accounts are also used to implement a strategy. Using strategies such as simulation analysis helps a business estimate performance even before a plan is rolled out.
Cost accounting and financial accounting are based on activities that have already happened. But management accounting usually focuses on future predictions. Due to this, the accounts require a high level of accuracy. The suitability of the accounts is greatly influenced by the accuracy of financial as well as cost accounting. It is therefore important for a small business to not only ensure accuracy but also that the correct strategy is formulated and implemented. Having regular management accounts is one of the most effective ways of managing and improving business performance in both short as well as long run.