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MONITORING THE FINANCIAL HEALTH OF YOUR BUSINESS
Monitoring the financial health of your business - By Paul Cox, Accounts & Audit Manager, Paish Tooth Ltd.
Monitoring the financial performance of your business is essential to ensuring its success. It’s vital to be aware of how you’re faring alongside your competition, and to use the correct financial tools to help you make timely decisions.
One of these tools is management accounts, which are a great way to help you maximise the performance potential of your business. In some ways they are similar to the annual accounts that are required for compliance purposes by HMRC and Companies House, as they report on the historical performance of your business. There are, however, some subtle differences.
Unlike annual accounts, management accounts are produced on a more regular basis, whether that be monthly, quarterly, or for any period that is useful to you as a business owner. Also, management accounts are not constrained to tight reporting formats, so they can be presented in a way that you understand and in a timely manner.
The level of detail that can be included is almost limitless, but ensuring that you report on the key areas of your business will help to make the accounts understandable and relevant and will avoid excessive detail.
The key benefits to producing management accounts are:
• Improved understanding of your business performance
• Greater control of the business
• Problems highlighted in a timely manner
• Improved decision making
• Improved access to funding
Management accounts provide a lot of insight into whether or not you are achieving your goals but the key, as with all information, is to know what to do with it once you have it.
How did I do?
The first thing to do is compare the results with your expectations. Typically this means comparing the results with your forecast figures and highlighting key variances. Once you have analysed your performance against your own forecasts it is good practice to establish why your results differ from your expectations.
A lot of small businesses do not have the time or resources to produce formal forecasts but they will still have their own inherent expectations against which to compare performance.
How do I compare?
Understanding how your business compares against your competitors is an invaluable tool in evaluating performance and understanding where your strengths and weaknesses lie. Using a benchmarking service will provide real-time industry averages to allow you to keep abreast of the most up-to-date and accurate trends in your specific industry.
It’s an important means of focusing on key changes that will enable you to improve your business to obtain that vital competitive edge and help make it look the way you want!
What if …..?
“What if” scenarios allow you to manipulate existing data to show how your performance would be affected if you changed certain variables. An example of a common “what if” scenario would be: What if I increased my prices by 1%? Management accounts form the perfect foundation for running “what if” scenarios with your data.
Room for improvement!
Management accounts will highlight areas that need improving and this allows you to formulate a plan of action to get your business to where you want it to be. It is important when making changes to first focus on the areas you consider key to your business. It is also worth remembering that most changes do not happen overnight. It’s essential not to become disheartened, although at the same time you do need to be able to recognise when something isn’t working and that it’s time to change the plan.
Improved access to funding
Preparation of regular management accounts highlights to lenders that you understand your business and you are serious about it. Making changes to your business, be that to finance new machinery or take on more staff, will almost inevitably require financing. Having management accounts to hand will improve your chances of obtaining the finance required without undue delay.
Paul Cox is a Chartered Certified Accountant with over 10 years’ experience in practice. He is ACCA qualified, and specialises in improving business efficiencies using accounting solutions such as Xero cloud accounting and ProfitCents software.