Why you need good management accounting for your business 

A surprisingly high number of businesses are not as on top of their finances as they should be and the recent Patisserie Valerie financial irregularities demonstrate why it’s more important than ever that companies maintain tighter controls over their accounting processes.

Management accounts refer to three main data sets: balance sheet, profit & loss, and cash flow forecast.

Why is cash flow forecasting important?

For a business to grow sustainably it needs to know how much cash is available rather than simply relying on profit and loss accounts. Look first at your balance sheet to give you an overview of a snapshot in time, then your profit and loss for revenue and expenses over a period and rough corporation tax prediction. However, turn to your cash flow forecast to show you how much cash you’ll have in the future.

If a business focuses too much on profit and not enough on cash flow it could find itself running out of funds to pay staff and suppliers and into insolvency surprisingly quickly.

Benefits of cash flow forecasting

Some of the advantages of cash flow forecasting include:

  • Knowing how much cash you will have in the bank: a cash flow forecast includes predicted income streams and outgoings and will help you to gauge, how much will be going out of the business 3 months or even 3 years in the future
  • Understanding how business decisions affect cash flow: you’ll know how much you have if you need to hire employees or move or expand office space, for example
  • Monitoring how much you’re spending: you can see if your projected budget is on track and where you may be overspending and to adjust it accordingly
  • Being able to pay suppliers on time: being late on payments could result in suppliers not wanting to work with you again. Cash flow forecasting ensures you’ll always know how much money will be available at any given time

In a recent blog we highlighted some of the cloud accounting software that’s available for businesses and which will help you keep on top of your finances in real-time. These included Xero, Quickbooks, Zoho Books, FreshBooks and FreeAgent.

 

Good management accounts and KPIs

Good financial reporting can highlight any issues early on and help you make more informed decisions. Reports should be reviewed by the finance team and directors on a regular basis.

Good management accounts are also important if you’re looking to raise finance for expansion.

Key performance indicators (KPIs) are used to reflect an organisation’s progress in relation to short or long term goals and can be used by all types of businesses in all industries.

However, it’s important to limit the KPIs to those that are going to help your business achieve its goals. Some key indicators that could be tracked include:

  • Working capital: this is cash that is immediately available and is calculated by subtracting your business’s existing current liabilities from its current assets. This KPI highlights available operating funds and whether you can cover your short-term liabilities.
  • Operating cash flow: this highlights your ability to pay for regular operating expenses. This KPI can also be used to compare your total capital, which reveals whether enough cash is being generated to support capital investments to advance the business.
  • Debt to equity ratio: this is calculated by looking at your business’s total liabilities in contrast to your shareholder’s equity. This KPI shows how well your business is funding its growth and how well you are using your shareholders’ investments. It reflects how much debt the business has accrued; a high debt-to-equity ratio reveals a practice of paying for growth by accruing debt so is very important.

Failure to use KPIs properly can be caused by insufficient planning and using a KPI without carefully assessing its practical value to the business can lead to problems and result in you focusing on the wrong things so be sure to implement KPIs that work for your business.

 

Have you got the required financial skills in your organisation?

Find out how our specialist finance recruitment team can help ensure your business planning and finance needs are met with our permanent, interim and part-time finance staff. Get in touch today for an initial consultation.

 

March 15, 2019