Small business owners should prepare management accounts alongside financial accounts.
Management accounts are important for tracking, recording and reporting financial information for management purposes.
There are no set standards for preparing managerial accounts and any business can design their own style according to their operation and business needs.
There are several benefits associated with these accounts. Not only can small business owners enjoy the benefits of creating a competitive advantage but can also leverage the way they do business in their markets.
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Management accounts can help a small business to lower its operating costs.
The information from these accounts will help the business owner to review the economic resources and other business operations.
It helps them to understand the cost of doing business in their current situation.
They will know the costs of producing goods and services and find out if cheaper raw materials will affect the quality of the final products and how consumers will respond. This will help them to source for cheaper factors of production and reduce the cost of doing business.
Improve Cash Flow
Management accounts involve a review of the budget in comparison with the actual expenditure. This is a good way for small businesses to understand their roadmap to the future.
Management accounts will go through the company’s financial history and come up with a master budget for the entire business. The owners will then know when to spend money and which items are either necessary or unnecessary.
Management accounts also help the small business owner to make appropriate decisions based on financial facts. Without these accounts, many managers make decisions based on qualitative analysis – this can be dangerous in the long run.
Management accounts provide quantitative analysis for several decision-making opportunities.
Small business managers will be able to have a clear understanding of the implications they expect when they make their business decisions.
Quick Decision Making
It’s not just the decisions in principle, one of the main benefits of having management accounts prepared regularly is to improve decision making speed.
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.
Increase Financial Returns
Small businesses can increase their financial returns using managerial accounts.
This is because the accountant can prepare a financial forecast showing consumer trends, potential sales and the effects of pricing strategies in the economic marketplace.
The small business owner will be in a better position to know the amount of products to produce in the current market prices in an anticipation to beat the competition in any future price changes.
Determining Production Quantities
A company’s intention is to produce more than one product or service using the same resources. For example, a baker will produce cookies and bread using the same resources.
A good accounting firm will make use of the workers to perform both auditing and preparation of management accounts.
This will help business owners to understand which products to produce most and which ones to reduce. This is a complex process that involves market demand analysis, capacity verifications, and costs of production and financial ratios that can be achieved through management accounts.
How Far To Process Products
Small business owners are often unable to clearly tell whether to process a product further or sell it in whatever form. Some think it would be more profitable to add value to the product while others prefer to sell it raw.
Management accounts will help a small business owner to understand how far a product or service should be processed to maximize profits. The accounts show what happens when factors of production are increased even by one unit.
Management Accounts Help Improve Performance
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.