Guest Blog: Why Management Accounts are important when your business is EO

Transitioning your business to employee ownership is an exciting step, but it changes aspects of your governance too. In our latest guest blog, Sean Hackemann, Director and Founder of Specialist Accounting Solutions Ltd, explains why robust, clear and timely Management Accounts are important when your business is employee-owned.

The challenge for new employee-owned businesses

Sean Hackemann, Director and Founder of Specialist Accounting Solutions Ltd

Many businesses undergo significant changes following an employee ownership (EO) transaction [writes Sean]. This often impacts the financial information and its users within the new employee-owned business.

For instance, there might be members in the new leadership team and the board of trustees who now have access to financial information, which was previously not disclosed to them. Some of the leadership team members might have limited experience in understanding Profit and Loss Accounts (P+L), Balance Sheets and Cash Flows and the associated KPIs.

Most employee-owned business will have a large debt to pay to the vendors over the next few years, and the combination of all these factors gives a new scale of importance to the monthly Management Accounts and their use.

Understanding the basics of your Management Accounts

It’s recommended that individuals in senior positions exposed to this (new) level of information (typically the Management Accounts) receive adequate training to understand the key financial statements and the KPIs of the business.

The more nuanced elements of the company’s financials will vary by sector and business, but they can be dealt with in more detail later on. For instance, the finance staff could provide group training sessions.

The acid test will be for the leadership team members and the trust board to see the Management Accounts and have a good grasp of how the business is performing financially.

Is there a budget?

‘Most new employee-owned businesses will have a substantial amount of debt to pay to the vendor… Given these financial pressures, it’s advisable to have a financial budget to know what profits need to be achieved, so that the business can afford the repayments’

Sean Hackemann, Specialist Accounting Solutions Ltd

Most new employee-owned businesses will have a substantial amount of debt to pay to the vendor (aka ‘deferred consideration’), which means the business needs to generate a certain level of profits to pay off the debt.

Normally this debt is repaid over five to seven years. Given these financial pressures, it’s advisable to have a financial budget to know what profits need to be achieved, so that the business can afford the repayments.

The absence of a budget would result in the leadership team not knowing if the business was on track in being able to repay the debt owed to the vendors.

The final piece in this jigsaw will be that the Management Accounts compare the actual performance to the budget, both on a monthly and a year-to-date basis, showing variances in both £ and percentages.

Based on the information presented, the users of the Management Accounts will then have the challenge to take appropriate actions, if they can see the business is off track (for example, if sales are too low and/or costs too high).

The timing of your Management Accounts

Sean Hackemann

When it comes to Management Accounts, the adage ‘timing is everything’ still holds true. The quicker these are presented, reviewed and discussed, the better.

There’s no point discussing January’s figures at the end of March, especially if this business is struggling because of unforeseen circumstances. We would recommend preparing these within 21 days of the previous month.

A major criterion is to ensure that the Management Accounts are still robust and reliable, even when working towards a quick turnaround.

There might be wider issues to consider here, such as the quality of the underlying systems and reporting software (for example, the company’s CRM system) feeding into the accounting system.

If the reports used as a basis to prepare the accounts are slow and clunky, it’s likely that the Management Accounts will be impacted negatively. It will either take longer to prepare the accounts, or they might not be reliable, or both.

The presentation of your Management Accounts

‘The Management Accounts should be presented clearly in a format that’s easy to understand and follow, even by ‘non-accountants’… If there’s confusion each time the numbers are discussed, or items are regularly missed (‘Oh, I didn’t’ spot that’), there’s a problem’

Sean Hackemann, Specialist Accounting Solutions Ltd

The Management Accounts should be presented clearly in a format that’s easy to understand and follow, even by ‘non-accountants’. This is easier said than done and it might be useful to seek external support to achieve this (higher) level of quality.

A good way to test this is how easily the Management Accounts can be understood by the leadership team and the trust board. If there’s confusion each time the numbers are discussed, or items are regularly missed (‘Oh, I didn’t’ spot that’), there’s a problem.

Some useful ways to help make Management Accounts more palatable are graphs, bar charts, tables with KPIs and summary P+Ls.

The bottom line of your Management Accounts

It is hardly surprising that the Management Accounts form a pivotal role in helping the new leadership team steer the employee-owned business towards ‘Financial Freedom Day’ – the day when all debts owing to the vendor are paid off.

In most cases, many years will pass and challenges will inevitably occur (such as Covid, recessions, cost of living crises).

Having a robust and reliable set of Management Accounts each month and being able to make informed decisions on what – and what not – to do will be just one of the many things a new employee-owned business and its leadership team will need to achieve, when the business embarks on its employee ownership journey.

Sean Hackemann is a Director and Founder of Specialist Accounting Solutions Ltd. Team SAS prepares independent business valuation reports for various scenarios, including employee ownership transactions and provides outsourced finance services to SMEs.

Find out more about them on their website here