At first glance, many small business owners might regard management accounting as an unnecessary process which carries additional cost - but what is the cost of ignoring the process?
Management accounting is process of transforming 'normal' bookkeeping activities into valuable, actionable business insights. Management accounting can inform financial and operational decision making - in fact, big businesses employ entire departments of professionals to report their management information - whilst their is a cost consideration for small businesses, the value of management accounting should not be ignored...
Integrate the process with your existing bookkeeping systems
“I have a small business... what exactly will management accounting information look like for me?”
If you already maintain a good record/book-keeping system, the building blocks of management information is already there - and what it looks like is entirely up to you!
For example, if you sell a variety of goods or services, you might want to understand which service is the most profitable so that you can focus your operational and marketing efforts on delivering the highest-margin strategy. Your management information might therefore, include sales-mix and margin analysis information.
If, on the other hand, you are looking to obtain a business loan, you might want to measure and track liquidity metrics (a common measure used by banks credit providers to assess your credit worthiness) - this is possible using your existing bookkeeping information, and your typical management information might include a measure of your company's liquidity with reference to how many times the business can settle its immediate liabilities with it's immediate (current) assets.
If you are focused on performance and returns, your management information might include profit margin analysis and metrics to assess how effectively your have deployed your assets to generate a return.
The real value in management accounting is deploying it over time...
Whatever your desired management accounting measures, the key to effective business management is to use this information over time. By adding value to your regular bookkeeping process and translating existing data into management information, you will already have a better insight into how your business performs and how it achieves that level performance, however - as your business evolves over time, it is important to track your management information over time to allow you to properly observe the trends. It might be that certain business activities in the past no longer contribute towards your financial goals in the same way as they did in the past - this is where deploying management information over time, adds significant value your business, as you will be able to spot changes in the trends as soon as they start to occur.
What is the cost for a small business?
“As a small business owner, is management accounting not too costly for me?”
If you already have a good bookkeeping system, the creation of management information is much more straight-forward and can be achieved at a low cost. This makes it possible for even small businesses to benefit from the management information. Once you have decided what metrics you want to track, the process can also be automated to some extent, further reducing the cost of generating this information. If you outsource your bookkeeping, then it's also worth considering outsourcing your management accounting, as your professional adviser will be able to help design and implement your management reporting information. We recommend preparing management information at least every quarter, but many businesses also opt for monthly management accounts.
See what you think...
If you are curious about management accounting and what it will look like for your business, visit our management accounting services page to read more (and see an example of what your management accounts might look like), at: www.waitefinancial.co.uk/management-accounting.