Can management accounts increase my profits?

January 31st, 2020     More profit

As business advisors, we’re often asked: “what is the purpose of management accounts?”

While it’s true that management accounts help you to better manage what you measure, clients are surprised when we tell them that management accounts can improve profitability.

In today’s blog, therefore, we’ve illuminated five ways management accounts can boost your bottom line.

  1. Digest complex information

It’s easy to get lost in the numbers. But to genuinely understand what’s happening in your business, we need to learn how well each ‘cog’ is turning.

While standard accounting reports are valuable, they only tell you how profitable your business is, rather than why.

Management accounts paint a complete picture of your business. By drafting up management accounts on a monthly or quarterly basis, we can distinguish which customers are the most profitable for you, which products move the fastest, identify late payments and poor suppliers, monitor production, collect and compare data by region or sales office, and lots, lots more.

Here are just a few more examples of key information which can be gained from management accounts:

  • Sales by region
  • Online versus offline sales
  • Sales by product or service
  • Productivity per site
  • Wastage per site
  • Expenditure per department
  • Evidence of cybercrime or employee fraud
  • Trends in the cost of supplies
  • Cash flow
  • Unusually high or low periods of productivity or sales
  • Late payments
  1. Make better-informed decisions

Now you’re armed with the information, it’s time to get out there and take advantage of it.

Management accounts empower you to make strong strategic decisions about how your company operates. Sales optimisation, for example, is an important factor in profitability. But without knowing what services or products are making you the most money, we cannot capitalise on high-growth areas of your business.

This is known as Pareto’s Law; the idea that 80 per cent of your output comes from just 20 per cent of your input. The principle serves as a reminder that the majority of your sales, and therefore profitability, could derive from just a small portion of your services or products.

Could you, therefore, benefit by refocusing your efforts on other, more profitable services using the information gained from your management accounts?

  1. Boost productivity

While essential, your standard accounting reports can’t reflect productivity and the hundreds of variables that go into the development and marketing of your products and services.

Only management accounts can provide you with deep insights into your business, one of these being productivity.

From useless meetings and unnecessary emails to automation and flexible working, productivity plays a major factor in your profitability.

After all, more output = more profits.

This fact was recently proved in a study carried out in the US by the Bureau of Labor Statistics. It found that just a 2.8 per cent increase in staff productivity led to a 3.1 per cent increase in output, resulting in a 13.2 per cent rise in annual profits.

So, how do management accounts help us boost productivity?

By understanding how we convert input (such as labour, materials and capital) into output (such as goods and services), we can analyse trends and ratios and optimise where resources are best allocated.

For example, if we know that factory X is producing more goods than factory Y, we can investigate why and plan how factory Y’s output can be improved. It may be that Factory X has received advanced training, has more supervisors on the floor, or has implemented more efficient controls.

  1. Tax planning

Small and medium-sized enterprises (SMEs) often focus on just one major tax deadline: the annual tax return.

But with all our administrative and accounting resources focused on just one key event, we can let other important tax dates pass us by.

The Annual Investment Allowance (AIA), for example, is a generous tax relief designed solely for large business investments. Under this scheme, businesses can deduct the full value of an item that qualifies for AIA from your profits before tax.

This year, however, the Government revealed that there would be an increase to the allowance.

Starting 1 January 2019, the AIA increased from £200,000 to £1 million for a period of two years. In order to maximise relief, therefore, your spending plans should focus on investing in essential equipment before the allowance is reverted to the standard amount.

Because management accounts are completed year-round, we can ensure that the capital purchase is delivered and paid for before the special allowance period lapses, as well as ensure that capital allowances are claimed before the deadline. Failure to do so could result in relief not being granted on qualifying purchases exceeding the standard allowance.

  1. Demonstrate credibility

Rather than tell someone how good your business is, show them.

Whether you are looking to raise finance or dispose of an interest in your company, management accounts help stakeholders better understand your business. This is because investors and financiers want to know what’s happening in your business right now, not six months ago. Strong quarterly or monthly results demonstrate that your business is growing and profitable, despite what external economic forecasts might portray.

We work with entrepreneurs to build the business they need, to have the life they want. If you want to talk about how to grow your business, get in touch with us on 01803 296678 or email andrew.price@andrewprice.co.uk.

Want more blogs like this? Click here to discover five simple steps to increase your profitability.