Dear Will

Welcome to the first issue of Forecast – the new bi-monthly newsletter from Graham Smith Business Services. I’ve sent it to you because I think you will find it useful, either for your own business or for others you know. My aim is to simplify and demystify the whole area of management accounting for you as a business owner, so in each issue I’ll take a different aspect and explain how you can really make it work for you in managing and growing your business.

If you’d rather not receive the advice please click on the link at the foot of this issue. If you do like the newsletter, please feel free to forward it to anyone else you think will enjoy reading it - they can subscribe to receive their own free monthly copy by clicking here.

With best wishes,

Graham

So What Are Management Accounts?

As a business owner, you already know that you need to record your activity rigorously and have effective financial controls in place. But do you really know how to get the most out of those core management accounting reports that your accountant (or your accounting package!) produces? Here’s the low down.

The four key reports to get to grips with are:

• Profit and Loss Account

• Balance Sheet

• Cashflow Report and Forecast

• Aged Debtors and Creditors Report.

The important thing to remember is that these accounts are intended to be active tools in the management of your business, not just more numbers to keep as a historical record. In learning to use these reports proactively, you’ll start to understand the dynamics of your business, and learn to control and manage it so that it delivers what you and your customers want it to.

The Profit and Loss Account* (P&L)

This is the most important tool in your kit, enabling you to compare your business’s activity both with the year to date, and with your budget. Of course, if you don’t have a budget, then you have already limited the value of your P&L, so this is the starting point: use your financial records, as well as your knowledge of what it costs to run your business, to produce target figures for all your expenditure.

Now you can really get a handle on how well your business is going from month to month and year to year.  You can avoid being surprised when the big bills like rent and rates come in! Having a budget for each item and solutions which smooth out the ‘spikes’ give you a baseline from which to develop your business over time. You are no longer reacting to what you are told by the historical record, but actually in the driving seat.

The Balance Sheet*

Much is made in business and in the business press of the importance of the Balance Sheet. Put simply the report shows all the business’s assets and liabilities . This report may be less important for you as a Director of a small business, though you will really see its value if and when you come to seek out investors who might want to buy your business. Possible investors will take great interest in what the Balance Sheet reveals about certain ratios in the business, but for the moment, you will probably be most interested in the lines which reveal your Bank Balance, money owed to you (debtors) and money you owe (creditors) and any Accruals* (see the column on the right for some definitions).

Cashflow

Cashflow is of crucial importance in every business. It’s vital that at any given point the business is taking in enough money to cover its regular and exceptional outgoings. The cash flow statement will give you a static, historical record of cash movements in and out of the business. Once again, however, I recommend you start to learn about and take a real interest in the tools which give you proactive control over what’s going on, and for this you need a cash flow forecast. Look out for the next issue where I’ll cover this area in depth.

Debtors and Creditors Report

It’s crucially important to take control of your debtors* and creditors*, as opposed to simply keeping records. With active management accounting, you can reduce the time it takes your customers to pay you, and avoid seriously inconveniencing or irritating your suppliers. More on the details of this area in future issues.

In Summary

By now you will see that management accounting has a very different purpose from simple accounting. By learning how to use its tools effectively, you can put yourself even more firmly in the driving seat of your own business, and enjoy the challenge of managing your business as a vital and growing entity!