The Benefits of Having Management Accounts Prepared for a Small Business

Management accounts are a secret weapon for small businesses – yet they are only used by a tiny fraction of businesses in the UK. Find out the benefits of having management accounts for your small business.

By helping you track, record and report all finances in a personalised way, management accounts are a great way to gain a competitive advantage and true insights to make strategic decisions that grow your business and profitability. 

We get it, though; one mention of the word accounts can be enough to trigger a yawn. But this article will show you a different light on management accounts and how you can use them to your advantage. 

What are management accounts? 

Before we talk about the benefits of having management accounts, let’s take a deeper look at what management accounts are (and issue a quick apology for how dry accounting explanations can be). 

Management accounts are a set of financial records made especially for internal use for managers, business owners or stakeholders, depending on the setup of your business. Unlike annual accounts, management reports are 100% private.

That means they can include a ton of extra, top-secret information and insights about your finances that you don’t want anyone else to see. 

In addition, they are fully personalised to you and your business. They include the information you want to include about the areas of your business you care about the most. Some common insights you might include in management accounts are: 

• Profit and loss reports, which show your business’s revenue, costs, and profits for the selected period. 
• A balance sheet, which acts like a quick snapshot into your current assets, liabilities, and equity. 
• Cash flow statements, or financial forecasts, which show the cash flow coming into the business and projects over the next period. 
• Key performance indicators (KPIs), which are set performance goals you want to focus on. 
• Budgets, and how your business is performing against any previously set budgets. 
• Analysis of the data, as well as insights on areas that need improvement, issues that need addressing or recommendations for future actions. 

However, as management accounts are internal – there are no set rules or guidelines you have to follow here. Simply put, you can put the information you want in there if it will help provide insights to improve your business. 

What are the benefits of having management accounts? 

Overview aside, let’s look into some of the biggest benefits of having management accounts as a small business.

1. Reduce expenses and save money

Management accounts can help a small business reduce expenses and save money by lowering operating costs. 

How? By having a thorough list of all your costs and expenses, you can go through them with a fine-tooth comb to uncover hidden costs that aren’t needed, where you are overpaying and where you can save with alternative suppliers. 

For example, Jenny has a small business making hand-made resin ornaments. On her management accounts, she’s compiled a list of her production costs and how much she’s been ordering for each unit.

Looking back over the data, she’s found that she’s consistently run out of metal keychains and had to order separate batches every month.

However, if she ordered a larger batch from the same supplier, she would have enough to last 2 months while receiving a discount. Go Jenny.

2. Improve your cash flow

Management accounts aren’t just about past performance; they’re your crystal ball for what lies ahead. 

By examining your past financial performance (and staying awake through the process!), you will gain a better insight into when, where, and why of your expenditures – and turn it into a roadmap to follow for 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 necessary or unnecessary, helping you stay on track of your finances and boost your profits.

3. Make smarter and faster business decisions

Another of the benefits of having management accounts is that you can make business decisions based on actual data rather than just gut feelings. Let’s go back to Jenny and her resin business. 

She’s looking into a new jewellery product, but doesn’t know if she should make necklace pendants or earrings. Without data, she would have to decide based on a gut feeling about which might have sold better in the past. 

Without management accounts, Jenny would say that she thinks earrings are a better seller, and choose that product.

However, looking at her management accounts, she can see that although earrings had slightly outsold necklaces, the cost to produce earrings is nearly double. If she opted for necklaces instead, she would receive bigger profits. 

Not only do management accounts help make these strategic decisions, they also help make you make these choices faster. Instead of spending hours (or days) thinking over the decision, you already have the information to hand to make the choice now.

4. Improve your success planning

1 in 5 businesses in the UK fail in their first year – mostly due to a lack of planning. Having a business plan is one of the key pillars to ensuring that your business doesn’t just survive, but grows and thrives. 

The best business plans are those that know which departments to concentrate on, which product requires improvement, what policy needs to be implemented and where to invest in future are some of the decisions a business owner and manager need to make.

And the only way to know these factors is to have the data. Management accounts provide this data – showing breakdowns of past performances and projections of your future success. It’s not just accounting; it’s the art of future-proofing your business.

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5. Accurate performance management

How well is your business performing right now? Is there anything else you can do to meet or surpass your goals? 

Management accounts are a great way to break down your business goals and measure where you are against them.

6. Maximised financial returns

Using financial forecasts in your management returns, you can explore insights such as customer trends to help anticipate sales and effectively strategise your pricing.

With this knowledge, you’ll be able to produce the right quantity to prepare for consumer trends, helping make the best returns in the most competitive of industries. 

7. Predict accurate production quantities 

The more products you can produce using the same resources, the more financial savings a company can get. For example, a baker will produce cookies and bread using the same resources. 

Using management accounts, you can understand which resources will produce the most products, and which products you should reduce to maximise your profits. In addition, you will also be able to gain insights on what form to sell the products in. 

Let’s go back to the bakery. Tom has the raw ingredients for cookies – but should he sell them as fully baked and ready-to-eat cookies, as cookie dough for customers to freshly bake at home, or as measured ingredient packets for customers to carry out the entire process at home?

Producing your own management accounts

As we’ve explored here, the benefits of having management accounts are plenty. They can help you save money, increase your profits and make many strategic decisions on how to grow your business based on proven past data. 

To make the most of management accounts, you need to ensure that the data that you use is accurate and correct. But even if you have little background experience in finance and bookkeeping, these reports might be easier than you think to create. 

Using accounting software is a great way to keep track of your finances and help create the reports you need. To help get you started, we’ve reviewed the top accounting software for small businesses here. 

If you need more help and advice on your accounts, it’s always recommended to speak to an accountant. For all other business news, tips and advice, keep up to date with Business4Beginners.