Be Prepared for the Road Ahead

Great management accounting is at the heart of every successful business. It drives profitable decision making and better business practice, and even creates a happier workforce.

But when you are busy running your business it’s easy to get lost in a fog of jargon or confused about how management accounting differs from other accounting such as financial or tax accounting.

If financial accounting is about reviewing the past through the balance sheet or last year’s profit and loss then management accounting is about planning the future with tools such as budgets and cash flow forecasts.

In a simple analogy if two accountants were driving a car then the financial accountant would be looking at the road behind while the management accountant would be looking at the road ahead. 

Of course the road ahead depends to some extent on the road behind and management accounting is only as good as the financial accounting it’s built on.

So if next year’s budget is based on last year’s numbers and they’re incomplete or just plain wrong that budget will be pretty much useless.
Like most systems, in management accounting rubbish in equals rubbish out!

Build Better Budgets 

The best budgets are built on financial accounting that is up to scratch, and include a level of detail that is informative without being overwhelming.

The best approach for your business will depend on how complex it is, how long you’ve been operating, the size and skills of the team and the level of financial information you can easily access and act on. Be realistic about revenue and expenses and don’t forget tax. Remember sales growth also means cost as well as revenue growth.

Incorporate flexibility; what if your five percent sales growth was only one percent or a key team member left and you had the unexpected cost of hiring a replacement, or a supplier went bust and your new supplier costs were five percent higher than the old ones?

Sales are not cash so always review your budget alongside your cash flow forecast; it will help highlight whether sales are turning into cash quickly enough or if you need to get on the phone to customers. And however you build your budget review it regularly against actual performance but don’t be surprised if there is variance, it’s rare that they will mirror exactly.

Experience or guidance from a firm of accountants such as Wilson Teis will help you identify trends that signal a problem, rather than reacting too quickly in a panic if something doesn’t match.

Cash Flow is Crucial

According to business analysts Dun and Bradstreet, 90% of small business failures are caused by poor cash flow. So building and regularly reviewing a robust cash flow forecast is vital to profitability.

A cash flow forecast will help you avoid traps like overestimating future sales, or not building in enough of a cash buffer to guard against unexpected bills, the risk of customer non-payment, or non-operational cash flows like your tax bill.

A good cash flow forecast will help you manage seasonality, avoid impulse spending, and set customer payment terms so you always have the right level of ‘working capital’ – that’s money left in the bank if you paid all your bills including tax and interest, and your customers paid theirs – to keep the business running profitably.

It is the cornerstone of consistent business management that sets expectations with customers and suppliers, lenders and other stakeholders, and builds a good business reputation.

Review Regularly and React

It doesn’t matter how detailed or well-crafted a budget is, or whether a cash flow forecasts the rosiest of futures, if they never see the light of day for 51 weeks of the year they are useless.

Unlike financial accounts which are generally produced, reviewed, signed off and filed, management accounts are working documents that are only useful if they are regularly reviewed against actual performance.

Finding the time to review your accounts can be hard when you are busy running your business. But you only need to touch base with the numbers for a short time each month to see benefit.

If time really is short pick two or three key lines in the reports and review against the actuals in detail, change the focus quarterly so everything gets reviewed.

It could be the difference between stopping systematic cost creep and getting to the end of the year without enough cash to pay your tax bill.

It might also highlight that you are regularly over ordering stock, or customers are not paying quickly enough, leading you to review your buying strategy or credit terms.

The most effective business decisions are the incremental changes that come from constant monitoring. Build skill in your management team with training, investing time now will mean that as your business grows and the numbers become more complex you’ll have an in-house team that can understand them. 

And partner with a firm of accountants who invest time in understanding your business at a detailed and a high level.

Lost for Words

Jargon is a great way for any profession to create the illusion that it is more complicated than it really is.

In accounting, accounts payable and accounts receivable are just different ways of saying what you owe and what you are owed. And inventory is just what you’ve got in stock … or even more simply the stuff you sell!

Budgets and cash flow forecasts are two of the most widely used and useful management accounting tools and while in the world of accounting they have fairly specific definitions, they are simple concepts.

But simplicity is not a byword for easy and great management accounting takes time, skill, practice and experience.

Which is why, at the heart of every successful business there is also a great management accounting team.

Pick a Great Team

Budgets and cash flow forecasts are simple concepts but creating them and then translating them into profitable business decisions takes expertise.

No one knows your business like you do, but you might not always have the time, skills or experience to apply that knowledge.

So making a professional firm of accountants like Wilson Teis part of your management team is just good business sense.

At Wilson Teis we have over 30 years’ experience supporting businesses like yours. If you are not sure where to start we can help you set up a suite of management reports including advice on how much detail and the best metrics to include for your industry. Or if time is the issue we can prepare those reports for you on a monthly basis.

We can even join your monthly management meetings for advice and guidance and keep you accountable while your new team builds confidence and experience. For more information contact us today.