Commercial dexterity is important to every business in every sector – having the ability to respond to changes, harness new trends, or recognise variations in appetites or regulations that mean an organisation needs to pivot or evolve to remain successful and sustainable.
One often overlooked aspect is the benefit of professional management accounting, especially in industries where reforms to regulatory or tax obligations or shifting consumer priorities can directly impact the business’s profitability.
Today, we share guidance from the commercial accounting specialists at James Todd & Co to clarify the value of management accounting and why this addition to your financial controls and reporting procedures can considerably impact your long-term trading prospects.
Management Accounting: The Basics
We often speak with clients who run successful businesses or who have great opportunities to expand into new areas but who don’t have a surefire way to ascertain how changes to their trading model will affect other parts of the company.
Likewise, we work with business owners here in Sussex and Hampshire, and further afield who have been running sector-leading organisations for years and don’t have any data or insights to determine why their returns, market share or position have suddenly started to decline.
The missing element in these and many other scenarios is management accounting, where businesses allocate time every month or quarter to review performance, spot trends and anomalies, and retain an up-to-date understanding of how things are going.
Management accounting is similar to preparing year-end statutory accounts, although it is wholly adapted to the needs of the business, its owners, or decision-makers. Audit services can complement management accounting by ensuring accuracy and compliance in financial reporting.
This type of internal accounting can provide regular reporting to pinpoint areas of downward and upward movement, support strategic investments or targeted expansions, and ensure business leaders know precisely how and where they are, or are not, hitting their performance targets.
For instance, if a business produces full accounts only at year-end, they might not identify that one product line or service is outselling all others within the first quarter – leading to shortages or capacity challenges, where they could have refocused their efforts to capitalise on the trend.
The Link Between Management Accounting and Commercial Agility
Back to agility—and why it is crucial to business success. Most companies trade in dynamic environments, which can be exposed to changes, volatility, and uncertainty due to countless factors, many of which are outside of their control.
Reliance on a static business model or assuming previous performance will remain constant is often a mistake, if that means a company doesn’t have the built-in resilience to make swift, decisive changes or monitor patterns that will influence its decision-making.
Whether adopting an internal reporting system or outsourcing comprehensive management accounting and performance monitoring to an accomplished accountancy team, the benefits are compelling. They include:
- The ability to make timely, informed decisions based on the most recently available data – extracting statistics and information from the latest month or quarter rather than utilising data that could be as much as a year out of date.
- Improved risk identification and mitigation, spotting financial and trading risks, such as cash flow bottlenecks, before they occur, and taking proactive steps to ensure the business remains stable.
- Faster responsiveness to changes, with oversight over current and historical performance to track variances and identify with precision where these are occurring – and what they mean for current trading.
- More targeted flexibility, using management accounts to decide how to allocate resources, and making real-time adjustments to plans or investment decisions based on constant re-evaluations of the sector climate.
Another vital business agility component is transparency, where management accounts are circulated to all key stakeholders or board members rather than providing information only within financial teams or departments.
Sharing information and reporting, having clarity about underperforming areas of the business, and making decisions based on overarching objectives ensure that all parties, managers, owners, and shareholders have confidence about why changes are being made and how this is beneficial.
Using Management Accounting to Improve Business Efficiency
Alongside enhanced agility and resilience, management accounting can free up capital by improving efficiencies within the business and ensuring that interim accounting measures offer a positive return on investment.
A comprehensive, customised set of management accounts might focus on specific areas, metrics, departments, deliverables, or targets based on the company’s needs, ensuring owners can pinpoint the connections between revenues, overheads, and investments.
Where businesses can streamline their workflows, cut back on unnecessary overheads, spot ways to speed up production, reduce shipping times, or address other delays or inefficiencies, they can act without delay and realise tangible cost reductions and healthier margins.
One common way to extract this benefit is to use management accounts to compare outputs or revenues against resource consumption, looking at cost drivers and the time-based cost of an activity or process against the income it generates – rather than analysing performance solely on a gross profit basis.
Reducing or reconfiguring resource allocations to those activities that generate the greatest contribution to profit margins can contribute to tactical strategies to build stronger business foundations.
Why Business Agility Goes Hand-in-Hand With Resilience
Over recent years, events like the pandemic have showcased the crucial importance of agility. Companies that could shift or adapt their operations remained viable and even grew by offering products or services that met the sudden change in consumer and B2B demand.
Political events and economic factors like sustained inflation, the cost-of-living crisis and material shortages owing to global conflicts have also put pressure on companies without the capacity to react dynamically – whether managing risks or grasping opportunities.
Any disruption to a business model that is met with agility can reinforce its resilience. The organisation is better placed to bounce back and reap the rewards once conditions stabilise or when normal levels of supply and demand resume.
Management accounting, best performed as a regular exercise, provides the information that makes this responsiveness possible and ensures business owners are never left trying to make retrospective decisions or chasing a trend that has long since moved on.
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