Management according is a vital business operation for established businesses and one of the essential operations for startups and small businesses. Effective management accounts can mean the difference between a successful stable business and a failed startup.
In this article, we explain how accounting services for small businesses in London can help you prepare effective management accounts. We discuss in detail the different elements of management accounts and how they can help you make better decisions about different business processes.
Note that accounting is a highly technical field, and if you’re not an accounting professional, you should outsource accounting services to a professional.
With that out of the way, let’s start by discussing what management accounts are and why they matter.
What Are Management Accounts?
Management accounts are reports made by accountants that summarize and analyze and financial information of a company. Unlike other kinds of financial reports, management accounts are not strictly formal. They are meant to provide a snapshot of the company’s financial health to the managers and business decision-makers. They provide managers and decision-makers with all the figures and analytical results they need to make informed decisions.
Management accounts can include budgeting, cash flow analysis, trend analysis, product costing, tax accounting, and many other aspects of a business. All these aspects help managers and decision-makers understand the company’s financial position. Tax accounting is particularly important for startups and small businesses.
This is because when you’re a new entrant into the market, your running costs are higher for your size than the established companies. Small businesses and startups need every pound they can save. If you’re a London-based startup or a small business, outsourcing to experienced accounting and tax consultants in London will save you a lot of money. This may be the one thing that saves you from repeating the mistakes of other startups that have failed in the past.
Elements of Management Accounts
Many elements of management accounts inform managers and decision-makers about the different financial aspects of business processes. Here, we explain in detail some of the most common elements of management accounts that chartered accountants in London work on.
Almost every startup struggles with budgeting. It’s hard to figure out where to cut costs and where to invest more when you don’t have much revenue. Some startups invest too much in marketing and not enough in production; they over-promise, underdeliver and end up failing.
Other startups fail because they don’t invest enough in marketing and can’t reach their target market. Even established small businesses don’t know exactly how to determine the budgets for different business processes.
Budgeting accounts are meant to give managers and decision-makers an idea of their return on investment. They allow managers to divide available funds to maximize the profits and long-term success of the company. This keeps business runners from overspending or underspending on any business process.
Budgeting accounts also keep track of any deviations in budgets and expected results. If the budget for some business operation is too high or too low for its value, managers and decision-makers can make appropriate adjustments in expenditures to maximize returns.
Product costing is something many startups don’t have a good model for. This is especially true for startups where business decision-makers are from backgrounds other than business, which is the case for most tech CEOs these days.
Product costing determines the charges incurred to produce a product or service. It can be broken down into four main categories: the cost of materials, the cost of labour, the cost of overhead, and the profit. Product costing is important for startups because it allows them to determine if their products or services are profitable. It also allows decision-makers to make better business decisions, i.e., whether to increase prices or decrease costs to stay profitable.
Many startups fail to consider that production costs never correlate linearly with the number of units produced. Producing a hundred units of a product doesn’t cost a hundred times more than producing a single unit; it costs far less. So, even if some product costs you too much now, it will eventually become profitable if your sales continue to grow. The same principle applies to services as well.
Still, that’s not the whole story. There’s a limiting factor that decreases profitability as the number of products produced increases, and that’s your target market. As a startup, you’ll likely appeal to a niche market. Once your products are used by most people in your target market, you reach market saturation.
You can still further increase your sales by trying to sell to people at the edge of your target market, but you’ll have to spend more on making for each unit sold than your profits. A far better way to grow after reaching market maturity is by developing new products that appeal to other market sectors.
All these decisions are made with product costing analytics at hand. If you’re a startup that doesn’t have management accountants, you can outsource services from chartered accountant firms in London and use their analyses to inform your decisions.
One of the biggest advantages that startups and new businesses have over megacorporations and market leaders is adaptability. Large companies always welcome incremental innovations that make their processes more efficient, but disruptive innovations are never good news for these companies.
Disruptive innovation is any changes in the business processes or technologies that are radically different from existing ones. When there is a disruptive innovation in the market that changes everything, it levels the playing field for all competitors in the market. The market leaders no longer have the upper hand in the new realm, and other businesses have a chance to increase their market share.
The internet is the most notable example of this in recent history. Online shopping was new territory for businesses of all sizes, giving them a chance to capture a greater market share. Only companies that looked at how fast the internet was growing in the dot com era became the new market leaders in online shopping, while those that were sceptical were left behind.
Emerging trends in the market are your greatest ally as a small business or a startup. They’re opportunities for you to increase your market share because larger companies can’t adapt as fast. Trend analysis allows you to make predictions for the future state of the market and the industry. Chartered accountants in London can use analysis techniques to project data into the future. You can evolve your business processes accordingly to get ahead of the competition.
Cash Flow Analysis
Cash flow analysis is a form of financial analysis that allows you to measure the impact of your financial decisions on your business. Cash flow may not be directly related to revenue or profits, but it’s still a good metric for determining the health of a business. It’s a vital tool for small businesses, which often have difficulty managing their cash flow. Cash flow analysis helps you understand where your money comes from and where it goes.
Large companies have hundreds of different operations, all impacting each other in complex unintelligible ways. When you’re a startup or a small business, it’s far easier to determine these cause-effect relationships. You can use this to your advantage and grow faster. A cash flow analysis tells you what processes correlate to cash flow and how different business decisions affect cash inflow and outflow. This allows you to make better decisions that improve your financial health.
Cash flow analysis is also useful for larger companies and established businesses. Businesses have to make sure they have enough liquid capital to pay all of their liabilities. At the same time, keeping too much capital around keeps the company from investing in growth and innovation. Cash flow analysis helps managers and business decision-makers determine exactly how much liquid capital is needed to cover the monthly liabilities, so no extra capital is left over.
Small businesses and startups often find it better to focus on certain operations while ignoring others. For example, tech CEOs often focus too much on developing their product, not marketing or sales. Many other entrepreneurs focus too much on marketing and branding and not enough on product development.
The underdeveloped business processes act as constraints for the more developed ones, which keeps the company from realizing its full potential. These constraints are often referred to as “bottlenecks” from the analogy that the flow from the bottle is determined by the neck, no matter how wide the bottle itself is. The only way to improve a business suffering from bottlenecks is to invest in processes that are causing these constraints.
Constraint analysis is the process of identifying bottlenecks. This type of management accounting also determines the impact of these contains on your profits, revenue, and cash flow. This allows you to determine how much you should invest in the bottleneck processes to optimally improve your business.
Any business process, from development and production to branding and sales, may be responsible for the constraints. It takes an experienced professional to identify these constraints correctly so you can invest in the right process. If you don’t have the necessary experience, we recommend hiring accounting services for small businesses in London.
How quickly your inventory turns over is an important figure to consider for managers and decision-makers. The total inventory of your company is a key indicator of your financial health. The faster you can turn over your inventory, the less merchandise you are holding on to. This allows you to invest in new products and services, which increases your profits and revenue. However, if your inventory isn’t turning over quickly enough, you are slowing down your business’s cash flow.
Inventory analysis in management accounting gives you insight into how inventory turnover rate relates to other business processes. It also gives you different inventory costs, such as the cost of storage and the losses from unsold items.
These figures are taken into account when making decisions about pricing, marketing and manufacturing. For example, lowering the price of a product can increase sales and lower waste enough to increase the total profits. Increasing the marketing budget can similarly improve profits. If you’ve reached market maturity and nothing else can be done, you can always reduce the number of units produced and save production costs.
Outsource to Chartered Accountants in London
There’s a general point to note throughout this article: having more insight into the finances of different business processes allows you to make more informed decisions. Many of the elements of management accounts require professional expertise in accounting. Unlike marketing and management, you can’t do accounting without formal business education and hands-on experience in the industry.
If you’re a startup, a small business owner or a business manager, accounting is the one area you need professional help with. However, you may have enough budget to hire an accountant. If this is the case, we can help.
At IBISS & Co., we’re a team of accounting and tax consultants in London that works with various businesses of all sizes. We provide accounting services for small businesses in London just like yours. Our professional chartered accountants in London have over 25 years of experience in tax planning and accountancy. We’re also a favourite accountant in London for self-employed people who need help with their finances and taxes.
Want expert help from professional chartered accountants in London? Get in touch for a free quote now!