Plenty of successful businesses practice management accounting because it allows them to base big business decisions on real-life data.
Alongside other important financial documents like the balance sheet, P&L and cash flow statement, your management accounts should be provided to the buyer if you’re selling a business.
Your seller will want to dig deep into the financials of your company. It’s only by having a good ‘rummage’ that they can work out how stable and profitable it is before moving through to the next stage of acquisition, typically being an offer or decision not to proceed.
But what exactly are management accounts and why should you use them? Aren’t the other financial documents enough?
What Are Management Accounts?
Management accounts are a type of financial report that businesses use internally to inform short-term and long-term business decisions. They are similar to Year End accounts but are less formal and can be personalised to suit your individual requirements. By monitoring operational metrics, management accounting helps businesses form and achieve goals.
The reports can be personalised to track whatever is required on top of the usual incomings and outgoings, with many businesses setting Key Performance Indicators, or KPIs. KPIs are a type of performance measurement, evaluating and quantifying the success of the business against its key objectives.
It’s easy to see then, how management accounts are extremely valuable to a buyer.
Because they break down the financial health of a company into different areas of performance, management accounts give an up-to-date, accurate overview of the financial health of a company.
The Many Roles Of Management Accounting
There are plenty of reasons why management accounting is used to benefit a business, and here are some of them.
1 – Forecasting Cash Flow
Management accounting allows you to check and control overhead costs and establish/benchmark what a profitable sale looks like, and the list doesn’t stop there. Being able to see how cash is expected to flow in and out of your business means you can spot trends, set budgets and plan effectively. Are the summer months slower for you? Plan around them!
2 – Monitoring Growth
Management accounts can be produced monthly, quarterly or yearly. The real-time data they provide on the same metrics month on month provides ample opportunity to analyse how your business is doing.
3 – Analysing And Working With Performance Discrepancies
Are the different areas of your business performing as expected? If not, why not? Tracking KPIs makes analysing the data much easier, allowing you to spot possible issues before they get bigger.
Management accounting provides business owners and management teams with a dashboard of crucial information, meaning early warning signs of negative trends can be spotted and future plans can be data-led.
Externally, management accounts can be used for reporting to any lenders and investors, for whom regular reporting will always be appreciated, even if not essential.
Why Are Management Accounts Useful For The Seller?
Simply making sure that your company bank balance remains in the positive and crossing your fingers come year end will not ensure the survival or flourishing of your business.
Management accounting allows a business owner to stay in control of their business, providing critical insight into the financials of its performance. This insight means business owners can react to trends and make better business decisions.
It’s pretty simple. Tracking performance makes for optimised profitability and growth.
Not only that, but businesses reporting monthly will be identifying and resolving queries throughout the year, meaning year-end audit and accounting costs need not be so high and the process will be shorter.
When you do come to sell, understanding the importance of Management Accounts and being able to immediately produce the same will also demonstrate to a potential Buyer that you have a finger on the financial pulse of your business. It should give comfort that they might inherit a well managed business.
Why Are Management Accounts Useful For The Buyer?
If it’s not clear already, management accounts provide an up-to-date picture of key financial information for anyone reading them. A buyer will want to see them for the current period with a forecast for the next 12 months broken down month by month.
A seller providing management accounts for the company that’s up for sale demonstrates a comprehensive understanding of what is happening within it. And as we know, trust and respect between buyer and seller are key to a positive sales process.
The reports themselves, and the information carried within them, determine whether or not the seller is accurate within their assessment of the performance of the business. Analysing the management accounts alongside other financial documents enables a buyer to see whether the business is on track to hit the suggested projections.
Does It All Add Up?
Thinking of selling your business but haven’t so much as glanced at management accounts before? Buying a business, looking over the financials and not sure how to interpret them? Clive is here to help.
Book a call with The Business Success Consultant today. He knows what he’s talking about.