Are there benefits to producing management accounts other than satisfying financial institutions such as factoring and invoice discounting companies.

For many small and medium sized enterprises the production of management accounts is seen as onerous, unnecessary and non-productive. There does not appear to be a major benefit. Our accountants produce the annual accounts once a year, prepare our tax calculations and that’s enough costs thank you. Produce figures on a regular monthly basis and it will cost even more. You know what those accountants’ bills are like!

But often when obtaining an overdraft or loan from a bank or entering into a factoring or invoice discounting arrangement the terms of the facility offered will require production of regular monthly or quarterly accounts.

So the only benefit derived from producing management accounts would appear to be to satisfy the requirements of a financial institution. The business gets the cost of producing the figures and the bank gets the benefit. Furthermore if the figures are not favourable they could withdraw or reduce the facility offered to the business.

But wait a minute. Surely there must be more to it than this. Can there be benefits to a business in producing regular and timely management accounts and should they be difficult to produce. Well the answer is YES there are benefits and NO with the use of a good accounting package they should not be difficult or expensive to produce.

The first thing any business needs to know is whether it is making any money. Management Accounts will provide the answer– the production of a regular profit & loss statement to assess whether the business is profitable or not whether it is growing or standing still and whether its sales are rising in line with its costs is essential to any business serious about its future. Management accounts inform management as to the state affairs of the business. With this information management should then be able to react accordingly. For example if costs have fallen whilst turnover has been maintained perhaps opportunities exist to price more competively to win more orders. If costs have risen perhaps a price review is needed or overheads need to be controlled or more turnover is needed to absorb fixed costs.

But I can get the same information from my Annual Accounts. Yes but when you do get the information its probably too late to react. Annual Accounts are produced once a year and often a considerable time after the period they refer to therefore rendering them too historical to be of much practical use.

The main benefit to a bank or a factor in requesting regular management accounts from their clients is not necessary the knowledge it gives of the financial performance of their client but the reassurance that their client also has that knowledge and is therefore able to use that knowledge to manage and control the business.