Management Accounts

You Wouldn't Take A Flight In A Plane Without A Pilot...

So Why Run A Business Without Timely Information?

- Jason Nellyer, M.D, OnTax Accountants Ltd

Did you get a surprise tax bill?

Struggling to have enough cash to pay bills?

Cant figure out what projects/products or services are making you money?

Perhaps it's time to consider getting management accounts.

What Can Management Accounts Do For You? An Overview

Profit

They can tell you how much profit (or loss) you have made so far and also areas you can fine tune to increase profits.

Taxes

Understand what your projected tax bill will be, allowing you to reduce it or save for it, without the late nasty surprise!

Projection

Based on what trading has already happened, the future can be projected with accuracy. Crystal ball technology at your fingertips!

Action

Management accounts allow you to take action BEFORE and not AFTER ensuring you get the best results.

What Can Be Included In Management Accounts?

Profit & Loss Accounts

These consider the income, minus the cost of goods sold i.e products bought for resale and/or made, the expenses (premises costs, office costs, vehicle costs, staff costs etc) and any other relevant matter. From this we can then estimate your taxes and vat.

Profit & Loss Projections

It's all very well knowing the historical perfomance of your business, but what about the future, where is it going? A projection can act like sat-nav GPS allowing you to know where you are today and where you are likely to end up. This means you can adapt and plan as required.

Cashflow Projection

Knowing where the company is today and where it will be in the next 30-60 days (with extreme accuracy) and where it will be in a years time approximately allows you to form strategies for tackling cash deficiencies as well as allowing you to foresee any capital investment opportunities (i.e new vehicles, plant and machinery etc).

Balance Sheet

A statement of assets, liabilities & capital of the company. It gives an overall idea of the companies financial strengths and weaknesses but is of less interest to a business owner than the profit & loss report and the cashflow report.

How Do I Use Management Accounts?

Understand Your Trading (Based On The P&L Account)

The Profit & Loss Account (Called a "P&L") consists of sales, cost of products, running expenses and some other items. A summary of these (and how to use each piece of information) is as follows:

Sales Breakdown - This will break down your sales. There are many ways to do this but the classic way would be by product (i.e if you run a shop then it might be by frozen goods, confectionary, fresh goods etc.

Cost Of Sales Breakdown (Abbreviated as "COS") - Continuing with our example of a shop, you will want to know the total cost of each type of product, this is very relevant as it affects "Gross Profit".

Gross Profit - This is the end result of the sales minus the cost of the products ("COS") sold. For instance, an item you sold at £10 that cost you £6 will result in a gross profit of £4. You will want to know what the total of each product is (thats the total sold, the cost to you and therefore the gross profit of each product). By doing this you can see how each item contributes to the total profit.

When it comes to measuring gross profit, here are some typical ways it would be done for various businesses:

  • A Shop - Products
  • Builder or Tradesman - Contract performance (assigning income and costs to specific contracts)
  • Heating Engineer - Planned maintenance versus reactive call outs
  • Online Sales - Products by website sold through (i.e sales of shoes in Ebay versus Amazon)
  • Clothing Retailer - Mens/Womens/Childs or casual versus formal
  • Vehicle Recovery - Private uplift versus contracts (and within the contracts section each entity would be listed)
  • An Accountant (!) - Sole traders versus limited companies versus partnerships

 

You get the idea, management accounts need to reflect YOUR business and how it operates. The more you understand the management accounts the better!

What Understanding Gross Profit Will Help You Do - By analysing your numbers this way, you can quickly see what products are profitable (or not). From this you can decide to either increase prices for that product, perhaps buy it cheaper, or even discontinue selling it and focus on more profitable activities.

Expenses - These are costs relating to staff, premises, vehicles, office, selling and suchlike. All expenses are funded by the gross profit you make, ultimately they use up the gross profit. So if your business profits need improving (and whose dont!), understanding your expenses and reviewing what can be reduced will  inturn increase your profits.

How To Review Your Expenses - When viewing your P&L, carefully consider each expense category as to whether it is excessive or not. Compare it to prior years (a good P&L will have prior years beside it). Some costs are static i.e your premises rent. Other costs vary with sales i.e if more is spent on advertising the sales should rise accordingly. So no expense should be isolated, consider it in the context of your business and whether it is vairable or static. Some things are worth paying the extra for, some are'nt. Seeing the costs of your business on paper and carefully considering them will ensure that nothing "runs away" and eats up your profits.

Taxes

At the bottom of the P&L will be a projected tax bill. It is the end result of all sales minus all relevant expenses. But what can you do about that tax bill?

If you are viewing your P&L before the end of your financial year (and I hope you are!), then taking action NOW can reduce your tax bill (often wipe it out completely!). Remember, you can do very little to change a tax bill AFTER the financial year has ended. Paying for management accounts is therefore very cost effective.

Firstly, lets clear up a complete misunderstanding many have of taxes. The tax you pay is a percentage of the profit. It certainly is not 100% of it. What I am saying here is that for every £1 spent, only a percentage of the tax bill will be wiped out. Spending £1000 will not decrease your tax bill by £1000. Much more likely is that it will reduce it by £190 (where the relevant rate of tax is 19%).

Some ways in which you can reduce your tax bill:

  • Buy new equipment, plant & machinery, a van (but NOT a company car)
  • Spend more on advertising (It will increase sales, timing of the spend is crucial)
  • Pay into a company pension
  • Replace defective items, repair items or premises
  • Increase salaries (but not dividends)
  • Further possibilities available (liase with us for more info)

There is one thing you should not do though, as it will not affect your tax bill. And that is to buy more stock simply to increase costs, because initially the cost of stock is held in the balance sheet and only appears in the P&L when it is matched to income i.e sales. When this happens, sales minus the cost of the products being sold will generate gross profit. It is at this point the cost of the stock is reflected in the P&L or "trading accounts". Until the stock is traded, it is parked up on the balance sheet. Buying stock merely to increase costs that reduce taxable profits and in turn taxes is therefore a false belief.

Projections

The difference between a projection and a guess is "metrics", the latter being a far more scientific and calculated way to work out where a business is going. For instance, a guess might be "I think sales will be £100K this year" whereas a projection would be "we will have 100 sales of product x (thats costs £x to buy) giving £x profit per unit".

When you build a projection from metrics, a change to any one factor will roll out across all the months and instantly update. A projection is a dynamic thing, something with real foundation to it. As such then, a projection is the ideal tool, especially when you have existing accounting data for your business becuase then we can use the "actuals" as part of the process for projecting from.

Why Have Projections? - Without projections you are "flying blind", you have no idea of where you are going and are virtually powerless to alter anything in time to ensure targets are met. 90% of businesses operate this way. Its no surprise that they suffer crippling tax bills, cash shortages, trading losses and eventually the end of the business. A short search at Companies House proves this, the "average" live company is not really that old in fact there are more dead ones than live ones!

Will Having Projections Help My Business? - Absolutely not! At least, not on their own! Without action, its simply numbers on paper. This is why truly understanding the management accounts is vital and why going through it with an Accountant is a must. Think about climbing Mount Everest, you can have the best equipment, best map but a guide is an absolute requirement to ensure you stay safe. your business is no different.

Action

Having management accounts demands action, they are not a passive thing to file in a drawer, the entire process has to be very rigid and lead you from understanding to action. So a basic action plan centered around management accounts will look like this:

  • Decide what will be measured in the business
  • Ensure you have a process to measure this or a way of capturing the core data
  • Have OnTax Accountants draw up the management accounts
  • Then sit down with us and TRULY understand them
  • Write down actions you will take and a date this will be done by
  • Undertake the actions
  • At the next set of management accounts observe if your actions acheived the desired result

There are only 3 routes to improving the profits of your business and you end action to improve profits will be one of these:

  1. Sell more (of selected lines/services)
  2. Increase the selling price (of some/all products/services)
  3. Reduce costs

If your plan is to reduce taxes then you will need to consider:

  • Buying tax deductible plant/machinery or vans
  • Spending on selected items that are tax deductible
  • Paying into a company pension plan

If you need help putting together a plan so that you can truly manage your business speak to us today! We have helped hundredsd of clients understand and manage their business better, thats what we are here for!

When Should I Have Management Accounts?

Many businesses have them completed (at the very least) in MONTH 9 of their financial year. This allows enough time for action i.e buying assets to reduce taxes.

How Much Do Management Accounts Cost?

Perhaps the question is "Are they value for money"? That depends on what value you put on your business. Would you rather pay the taxman money or instead pay to fully understand all the factors that are driving the financials in your business and in doing so vastly reduce your taxes? Would you rather "fly blind", "take a chance", even "wing it and hope" or will you work with an accountant who can best steer you towards profit?

The answer isn't "What do management accounts cost?" but rather "What will it cost me me in additional taxes/vat along with lost opportunity and sales if I DONT have management accounts?"

Management accounts are not "an extra" but rather they are something that most business owners are either unaware of or choose to skimp on in the belief that "a cheaper accounting fee must surely be a good thing". Is less info really a good thing?

Our fee for management accounts starts at £750+vat for a month 9 set. For this fee you get a Profit & Loss Report to date, a comparable to the prior year, a projected tax bill and a sit-down meeting with an accountant to fully discuss your businesses performance and action plan. We will help and guide you through the entire journey.

To understand better how we can help you, please call OnTax Accountants Ltd for a one-to-one discussion. It's the start of an exciting journey!