The objective of management accounts is to provide timely and key financial information for managers to make short-term decisions.
They are usually produced monthly and cover cashflow, an income statement and a balance sheet. You should also keep an eye on your margins and measure your performance in all areas against a budget.
Gross margin
Companies are often obsessed by revenue and of course this is a key indicator of progress, however I like to focus on gross margin. The average gross margin you should expect from your business will depend on what industry you are in, the products you are selling and where you sit in the supply chain. A distributor may be happy to operate on a gross margin of 5% whereas a reseller may need 40% to cover the cost of serving their customers and to compensate them for the value they add. I am always thinking about how I can buy better, reduce the cost to serve without affecting quality and the optimum price for each product. Look at the margin analysis by product to see if your mix of products is right and think about what you can do to increase the volume of higher margin products.
Cash
The other key focus is of course cash. If your customers take longer on average to pay you than you have to pay your suppliers, then you have a working capital problem. Try and get customers to sign up to direct debit if your business involves regular payments from them. Once you have done all you can to narrow the gap between paying suppliers and receiving money from customers, take your budget to your bank and ask them for an overdraft to help with working capital. You may be asked to sign a personal guarantee and unless you have a large bad debt problem you will probably be happy to do so.
Balance sheet
You will mainly be focused on P&L, cashflow and margin but you should also think about your balance sheet. This shows the overall health of your business and is often how external organisations (banks, suppliers, potential customers) judge you. A positive balance sheet means everything you own exceeds the value of what you owe i.e. you are solvent. There is a legal requirement that you ensure your company does not continue to trade whilst insolvent.
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