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Management Accounts.

In the second in our series of articles highlighting the essential information SMEs should have ready in their financial ‘kitbag’ when raising finance, we look at the Management Accounts, regarded by many as a key element of a company’s management information.

For a significant proportion of smaller businesses, producing the ‘Accounts’ may appear to be a purely administrative exercise undertaken by their accountants a number of months after their financial year end. Whilst the filing of a company’s annual financial statement is an important statutory obligation, how many SMEs stop to look at what they contain and, more importantly, what they mean and what can be learned from them in terms of making the business operate more efficiently and successfully both in the present and future?

As part of routine financial housekeeping, every business should keep their accounting records (their ‘books’) up to date. That doesn’t mean that the accountant necessarily needs to make entries on a daily basis of every single item because that might be impractical. However, SMEs should look to keep their books materially up to date on a weekly basis and review key financial information at least monthly for their own benefit.

Turnover, costs, gross profit and administrative costs all help provide a clear indication of net profit – this being the creation of value in your business which is, after all, the reason why commercial SMEs exist. It is a pure gamble to wait more than a year or, in some cases, 18-21 months, to find out whether or not you were operating profitably.

Psychologically, many business owners still fixate on turnover, but ultimately profit is the measure of what you take home.

Similarly, some key assets and liabilities should be monitored regularly and kept under tight control. Typically these would include cash balances, stock levels, debtors and creditors, all of which move frequently and can impact on a business’ ability to trade solvently.

Management Accounts are therefore a key item in an SME’s kitbag and, with so many cloud-based accounting systems available at a relatively low cost, a good degree of up to date financial information is easily achievable. Such systems are not simply easy to obtain, but also relatively easy to understand and operate. Just as importantly, many are also capable of importing transactional detail from spreadsheets so, if that is how information is usually recorded, there need be no duplication of effort.

They are also capable of importing transactions from an online banking system and automatically reconciling them – a function that you may be paying your accountant to carry out. Standard reports make useful management information available at the push of a button. The only proviso is that the quality of the information relies on good quality inputs otherwise its value and use is significantly reduced.

As a lender, we will always ask for an up to date balance sheet because it provides an instant snapshot of the business and its financial health. Provided the information contained in a balance sheet is accurate, it will tell the analyst or underwriter all they need to know in a matter of minutes. Remember, these are your numbers and you should own them, not allow them to be the preserve of the accountants alone.

Technological advances mean that some lenders can now interrogate a client’s or prospective client’s accounting software directly in order to reach their decision about either whether they are prepared to lend for the first time, or perhaps offer further funds to an existing borrower. This provides some indication of the shape of things to come and it is clear to see that lending decisions will be driven increasingly by the accessibility and quality of financial information. Recording of an SME’s financial data, in some form or another, is likely to be the only human dimension but nonetheless still the most important.

This is the second of a four part series. To read the other instalments, visit The Credit4 Financial Kitbag: Cashflow Forecasts and The Credit4 Financial Kitbag: Business Plan

If you would like to find out more about flexible growth funding from Credit4, give us a call on 020 3637 0570 or visit our website at www.credit4.co.uk.