Reliable, proactive accountancy services for great small businesses.
July 27th 2019

Ten steps to better management accounts

Successful business owners know that having reliable management accounts at hand gives them an edge when it comes to monitoring and managing the business finances.

Running a business without accurate management accounts is a bit like driving a car with your eyes closed - you've got no idea where you're going... and you rarely end up where you expect.

In our experience there is a number of things that bookkeepers need to be doing to make sure the numbers are right. Start here...

1. Processing transactions on time

This may seem kind of obvious, but if this is an issue in your business, consider why? Keeping the accounts up to date should be a top priority in any business, not only because it is the only way business owners can get a complete picture of their business's financial performance and position, but also because it may be a requirement under VAT, PAYE or other laws and regulations. So if the business's books aren't up to date, is this because of a resourcing issue, or a failure to prioritise correctly? Or both?

2. Reconciling the bank account regularly

The business bank account(s) should be reconciled to the accounting records at least once a month and any discrepancies or long standing timing differences investigated. This basic internal control gives business owners some assurance that receipts and payments have been correctly entered into the accounting system. If bank reconciliations are not correctly performed, it is more likely that the management information generated by the accounting system will be incorrect, potentially in very significant ways.

3. Reviewing aged debtors

For businesses that make sales on credit, reviewing the aged debtors report is a key discipline. As well as helping to reveal potential errors in debtors/ sales (such as duplicate or missing sales invoices), it is also a key activity in managing cashflow since overdue debts need to be identified and followed up promptly.

4. Reviewing aged creditors

The aged creditors report should be reviewed at least monthly to help ensure that creditors/ purchases have been entered correctly. A common mistake involves entering purchase invoices in the accounting system, but then entering the payment to the supplier directly to the profit & loss account. Another common issue is that suppliers are paid from the business owner's own pocket, but those payments are not entered into the accounting system.

If the aged creditors report contains lots of old supplier balances that have definitely been paid, this is a sure sign that one of these problems (or perhaps both) is happening in your business.

5. Posting depreciation charges

Depreciation charges show the economic effect of a business "using up" its fixed assets (property, plant & machinery etc). Except where the depreciation charge is trivial, depreciation charges should be included in the books on a monthly or quarterly basis through each year. Failing to provide for depreciation is a common reason why management accounts produced by a business can differ significantly from the business's year-end statutory accounts. Businesses should maintain a register of fixed assets which can be used as the basis for calculating the depreciation charges (we maintain asset registers for most of our business clients).

6. Processing wages journals

Posting proper wages journals helps ensure that the profit & loss account accurately shows the labour costs incurred by a business; and the balance sheet accurately shows the business's liability to pay wages and deductions (income tax, pensions etc). A common problem arises where, instead of posting wages journals, the payments are just posted straight to the profit & loss account, which means the financial position with respect to the payroll is incorrectly stated. In some cases we see, the payments are just posted to the balance sheet, which is even worse because then, the labour costs don't appear on the profit & loss account at all, they just sit in the balance sheet as a "negative creditor".

7. Reconciling key control accounts

Key control accounts should be reconciled on a monthly basis. These include VAT, wages, PAYE, pensions, and any other control accounts maintained by the business. The purpose of reconciling control accounts is to provide the business owner with some assurance that the financial position in the management accounts is correctly stated. Where control accounts are not properly maintained, it is more likely that errors will remain undetected and the management accounts may be misleading.

8. Updating stock and work-in-progress

Businesses that work with significant stock and/ or work in progress should make appropriate adjustments to the accounting records on a monthly or quarterly basis (the frequency depending on how often management accounts are to be prepared). Significant fluctuations in stock or work in progress from one period to the next will have a big impact on the profit reported in the profit & loss account and the current assets reported in the balance sheet.

9. Adjusting for expense accruals and prepayments

Profits are determined by the economic effects of transactions a business enters into, not necessarily by the cash flows or amounts invoiced in a particular financial period. For this reason, when preparing management accounts the underlying accounting records should be adjusted to recognise expenses that have accrued (ie expenses that have been incurred, but not yet invoiced to the business), and expenses that have been prepaid (ie expenses that have been charged to the business where the benefit has not yet been realised).

10. Adjusting for income accruals and customer payments on account

For some businesses, income accruals and customer payments on account will also have a huge bearing on the management accounts. In general terms, income from customer contracts is normally recognised as contract activity progresses, but the pattern of payments received from a customer may be very different. Put simply, customers may pay in advance, or in arrears, of when work is done, and where this happens adjustments often need to be made in the accounting records to make sure that the income reported in the management accounts is correctly stated.

Conclusion

If your bookkeeper is getting all of this right, the chances are your management accounts are already giving you a pretty reliable picture of the business's financial performance and position.

If not, consider whether they would benefit from some additional training and support from your accountant - often, a bit of training and advice can lead to huge transformational changes in the quality of the management accounts you receive.

If you'd like some help or have any questions about the points raised in this article, contact us today.

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