While not necessarily experts, most owners of businesses will have a working knowledge of their accounting obligations. Most will understand the basics and know that there are certain documents that must be filed on time to keep on the right side of HMRC.
Management accounting is a bit different. Management accounting is not a legal obligation for business owners; in fact, you could consider it a luxury. While financial accounting produces information about the business’s performance for external stakeholders, management accounting provides key insights into your business that can improve your planning, control and decision making.
So, if you’re thinking of taking your first steps into management accounting, what are the key pieces of information that can help your business grow?
Working Capital and Cash-Flow
Cash-flow is crucial to the successful running and operation of a growing business, but many businesses lack even a basic understanding of how and when money comes into the company, and when it leaves.
Having information such as your creditor days (the time it takes to settle your debts) and debtor days (how quickly you collect money from debtors), stock turnover (how quickly stock is sold and replaced over time) and daily cash balances (how much money is in the bank), will give you valuable insight into this incredibly important part of your business.
Most business owners will have a ballpark figure for the total costs of their business, but very few will actually understand where this figure comes from. A thorough understanding of costs is crucial to the growth of your business as it can influence your pricing decisions, and ultimately your profit margin.
A company’s total costs only tell one part of the story. To gain a better understanding of your costs you need to break this figure down. What are your fixed costs (those that remain constant despite the level of output e.g. rent) in comparison to your variable costs (those that change with the level of activity e.g. materials, labour etc.)?
What about the cost of goods sold (total cost to create a product or service), and your operating expenses (the costs incurred running the business e.g. admin)? The more information you have, the greater your control over how costs are incurred.
What would be the impact on your profit margin if sales fell by 10 percent? What if sales rose by 20 percent? Cost-volume-profit analysis looks closely at the impact differing levels of activity would have on your business’s bottom line. You can then calculate the level of sales you need to break even (the point at which cost and income are equal), and the sales figures you’ll need to make different levels of profit.
The liquidity of your business has an incredibly important role to play in its long-term survival. Liquidity is a measure of a business’s ability to pay its short-term debts. One of the most useful and insightful liquidity ratios is the current ratio (current assets/current liabilities), which measures a company’s ability to pay both its short-term and long-term liabilities.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.