Management Accounting – What Info do Small Businesses Need and What’s Useful?
All small business owners will be familiar with financial accounting, but managerial accounting, while still quantitative information about the company’s performance, serves an entirely different purpose. Financial accounting provides external stakeholders with information about the company’s performance. Management accounting gives business owners and managers the information they need to make key decisions.
Management accounting has an integral role in improving planning and control in the UK’s small businesses. In these type of businesses, producing the management accounts is often the responsibility of the company owner. Where resources are stretched, this is clearly a decision that can save a small business money, but it can also impact on the quality of the information produced.
There is no legal requirement to prepare management accounts, but it can be difficult to run a business effectively without them. So, if the responsibility for maintaining your company’s management accounts falls at your door, this is some of the information you’ll need to give your small business the edge.
1. Business Costs
A thorough understanding of a business’s costs is crucial to its performance. A lack of knowledge and understanding of costs can detrimentally impact a small business’s pricing decisions. The figure for the total costs of the business is actually only one part of the story. By performing a cost analysis this figure can be broken down into more valuable chunks. This will help you understand where company money is being spent and where costs are spiraling out of control. You will also have a much clearer idea of the prices you need to charge to increase your profitability.
2. Working Capital and Cash-Flow
Many small businesses lack an understanding of their cash-flow, which is crucial to the running of a successful business. Having access to information such as debtor and creditor days, stock turn and daily cash balances can provide valuable insight into your cash-flow situation and ensure you have the working capital you need to operate.
While end of year sales figures will allow you to identify whether total sales have increased or decreased, such a broad view is unlikely to improve decision making or help you exercise control over your business. As part of your small business management accounts, you should perform an analysis of your sales by product or service area. This will allow you to identify which products and services are your top performers and which may be starting to fail. You can then make informed decisions about future investments.
4. Cost-Volume-Profit analysis
Cost-volume-profit analysis looks primarily at the impact of differing levels of activity on the financial results of a business. This will give you insight into how changes in the costs and sales volumes of your business will affect profitability. You can then calculate how many sales the business will need to make to break-even, as well as the sales figures that’ll lead to different levels of profit.
Liquidity is a key factor in any business’s performance as it determines the business’s ability to pay its short-term debts. The current ratio – current assets divided by current liabilities – is a measure of your solvency, and is a crucial metric for small businesses. A healthy business should have a current ratio close to 2. This means you’ll have twice as many assets as liabilities.
To find out how KPMG Small Business Accounting could help free up your time so you can concentrate on business success, request a callback for a quote today.
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