Say you’ve sold some of your products or services and have raised an invoice to your customer (ideally in accounting software, but that’s for another blog) or have taken payment via your website. In order to make that sale it’s likely you would have had to spend some money on stock, software, a website, renting an office, or some other hidden cost that you hadn’t even thought was connected.

 

How can you work out from this jumble of numbers if you’ve made a profit, and how will you know if it’s a good or a poor profit? OK, profit is profit to some, but working out if that’s sustainable, and a one-off or a trend will give you a better insight to where you’re heading and where you’re going to be. It can also help you understand what you need to do to improve the situation.

 

In my previous role I was a Finance Manager and my main focus was studying the numbers in the business. One of my jobs was to analyse trends, look for patterns, and reconcile the variances. This information was reported to the management team in a set of appropriately-named management accounts, which included the 2 main financial reports of the Profit and Loss Account and the Balance Sheet, along with ratios and written commentaries.

 

A Profit and Loss Report (P&L) does what it says on the tin – it shows you the profit or loss made after direct expenses (cost of sales) and indirect expenses (your other overheads). It can also include your estimated tax liabilities.

 

The Balance Sheet shows you all the assets, liabilities and equity in your business. It’s all the numbers that don’t hit the P&L, including debtors/creditors, stock value, cash in the bank, tax liabilities and retained earnings. A set of management accounts will normally include both reports to cover all angles.

 

Management accounts can tell you a story through these reports by comparing sales turnover month on month, quarter on quarter, year on year. You’ll be able to see where there are any dips or peaks in sales, allowing for further analysis if required. As time goes by you’ll be able to start identifying any seasonality or cyclical patterns. This works the same for your expenses and overheads, and if you have a budget to compare to as well this can help to highlight variances even more.  

 

If you have access to industry-specific data or ratios then these can also aid with analysis. For example, some businesses may see that high levels of sales come with high levels of costs but that might be quite the norm for their industry.

 

Margin percentages don’t always indicate good or poor profits without any other reference point, so it’s important to discover whether your margins are acceptable. Most businesses are likely to incur a mixture of fixed and variable costs, and it’s important to make sure you can cover your fixed costs at your lowest turnover level.

 

To make things more user-friendly (some may say “fun”!), management accounts can include graphics such as charts and graphs to show increases and decreases in a more visual (and exciting) way. Staring at a list of numbers isn’t going to make sense to everyone and so the beauty of having tailor-made management accounts is that the information can be presented in the best way to suit the target audience.

 

It is indeed important to know how much tax you will need to pay across to our friends at HMRC at varying points during the year, but I truly believe that if you can see how you got there and what you could do to change things for next time then that is invaluable for business growth and development.

 

Speak to our team to get tailored management accounts reports added to your reporting schedules.