Many entrepreneurs do not want to face the truth: their business is profitable or unprofitable. Therefore, they ignore management accounting, justifying it by saying: ‘Finance is something very complicated, a whole science that is simply impossible to master and, in general, it is for large companies, but we are doing fine, we are counting something. We'll get it right later, because it's hard, scary and time-consuming.’ As a result, you are at least underperforming on a daily basis, and at most losing money.

‍We'll show you with a real-life case study

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Yevhen is the owner of Legal In, a law firm that has five areas of activity. In general, the company is profitable, but Eugene did not know whether each area was profitable. He wanted to scale the company, so he was thinking about opening new areas and entering a new market.

But!

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After analysing each area separately, it became clear that out of the five areas, two were deeply unprofitable, one broke even, and only two were profitable. What decision did Yevhen make? He closed the one that was breaking even and reoriented his employees to the profitable areas to strengthen them. One of the unprofitable areas was closed, the other was kept because it was the entry point for the profitable areas, but we had to work hard and optimise costs. And now this area is not unprofitable.

So, out of five areas, only three were left, and the following month, Legal In doubled its profit. With the same team, the same resources, the same clients.

Without financial management, it is very difficult to see where the weaknesses in your business are. Therefore, in order to make complex management decisions, it is important to see the full picture, to keep not only general records but also records of each project separately, as our client did with Finmap.

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What effective management accounting should look like

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1. All information on money is collected in one place

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Current card accounts, cash in all currencies, and even cryptocurrencies - in a single convenient place where accounting is kept separately not for legal entities, but for the money and wallets of your business. The owner can see in real time how much money the business actually has, what the profit is, where it went, and where the money went.

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2. Unified data

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Every business should have uniform and understandable rules for management accounting:

- who is responsible;
- timeframes for collecting information and reporting;
- structure of income and expenses;
- clearly defined areas and projects;
- rules for calculating profit, cost, depreciation, etc.

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3. Convenient analytics built

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In order to make effective management decisions, a business owner should have at least several months‘ worth of data, or better yet, years’ worth, in order to analyse the dynamics of changes in monetary terms and as a percentage. It is desirable that this data is displayed in a convenient, understandable format in the form of graphs and dashboards, rather than in a bunch of home-made tables. This format will help you to focus on making management decisions and not spend a lot of time on compiling numerous tables.

4. Segmented profit calculation

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Profit should be calculated not for the company as a whole, but by project, facility, area, product group, and sales channel. Margin and profitability should also be calculated. It is thanks to segmented calculations that entrepreneurs can clearly see why it is decreasing and what to do to make it grow.

5. Calculated break-even point

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How much you need to sell: per day, per month to break even. Where is the line between profit and loss, and how much sales do you need to ensure that your business is self-sustaining?

These indicators must be calculated and constantly monitored for the company to operate effectively.  

6. There is a fixed plan of income and expenses

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Imagine that tomorrow you need to pay a commission to a contractor, and you only have enough money left in your account to buy cookies for the office. In a week, you will receive payment for a large order, but in the meantime, the contractor will send you messages full of dissatisfaction and threats to terminate cooperation. This situation doesn't mean that your business is unprofitable, it means that you have a cash gap - a temporary lack of funds to cover your current expenses.

In order not to make your contractors nervous and waste their last nerve cells, it is important for business owners to keep a payment calendar. It will help control cash flow and avoid force majeure.

The payment calendar indicates the expected income and expenses for a certain period of time. You can create it in an Excel spreadsheet or use a convenient automated tool in Finmap.

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So what is the main purpose of management accounting?

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In fact, management accounting is a kind of navigator that helps to build and optimise a long-term business strategy, set realistic goals and strive for them, and build a sustainable and profitable business. And Finmap, a simple online management accounting software, will help you make this process simple and straightforward.

With Finmap, you can:

- See business money on one screen;
- Receive automatic management reports in just two clicks;
- Plan income and expenses;
- Delegate routine tasks to employees;
- Get maximum profit from your business;

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Start building a successful future for your company today!

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