Management accounts, also known as management accounting reports, show up-to-date financial information and other key data about a business. They summarise the business’ current financial health and are a valuable tool that can be used to make strategic decisions.
Unlike statutory year end accounts, which limited companies must file with HM Revenue and Customs and Companies House, management accounts are not a legal requirement.
Both statutory and management accounts are based on income, cash flow and balance sheet data but they differ in how the information is used.
Statutory accounts are an annual statement of your financial position that follow a set format and focus purely on the numbers to meet government requirements.
Management accounts are a more regular and detailed analysis of your business’ performance which contain whatever information is important to you. They can cover any period, although most businesses produce them monthly or quarterly.
You can put management accounts together yourself but it is recommended that you use the services of an experienced accountant to ensure they are accurate.
What are the benefits of management accounts?
Management accounts allow you to gain a detailed understanding of your business which is vital if you want to achieve success. The reports contain important information such as how much money has moved in and out of the business, your cash flow situation and your profit and loss.
Without a full grasp of how your business is performing, you might not spot if something isn’t going well and then fail to make the necessary changes. Analysing the data in management accounts arms the decision makers in a business with the information they need to steer it in the right direction.
The benefits of management accounts include:
Boost business growth
Monthly and quarterly management accounts mean you can accurately monitor the growth of your business and focus on what is most profitable. For example, by spotting sales trends you can ensure you have enough stock to meet demand or diversify into complementary products.
Monitor your costs
Using management accounts, you can accurately track your costs. This might highlight areas where you are spending too much and if you need to reduce your expenses.
Plan for the future
Management accounts help you to make informed decisions for your business. By spotting patterns in income and cash flow, you can accurately predict your future revenue and make plans.
The data might highlight a need to branch out into new products, services or locations. Conversely, they could show that a particular site, product or service needs to be axed because it’s not performing well.
Management accounts also help you plan for slower months when cash flow might be lower due to seasonal differences.
Efficient tax and dividend planning
Help you secure funding
Lenders and investors need up-to-date financial management accounts before deciding whether to give you a loan or invest in your business. Alongside a strong business plan, regular management accounts mean you can provide the required data and forecasts. It will demonstrate that you have a strong understanding of your business’ performance.
What should you include in management accounts?
There’s no one-size fits all solution to management accounts as they should be tailored to the needs and goals of the specific business. However, there’s some information that’s commonly included in management reports:
Key performance indicators (KPIs)
KPIs are measurable goals that you want your business to achieve during a particular period of time. They can be financial and performance based.
Areas you might want to focus on include:
- growth in sales
- gross profit margin
- cash flow
- number of customers
- customer satisfaction levels
- number of sales leads
Use your management accounts to check if you are meeting your KPIs. If you discover you aren’t on track, you’ll know where you need to make improvements.
Profit and loss (P&L) statement
A profit and loss statement, also known as an income statement, outlines your revenue, direct costs and expenses. Subtracting all expenditure from income will show your business’ net profit or loss.
Management accounts can include a P&L for different departments or locations to show which are performing the best. You can also compare your P&L actuals to forecasts or industry benchmarks and adjust if necessary.
It’s vital that you monitor your business’ cash flow to ensure you don’t run out of money. Include in your management accounts a summary of how much cash is flowing in and out of your business in the period the accounts cover. You need to know this when making any investment decisions. It will also indicate whether you need to access funding.
Use your management accounts to analyse this data for patterns such as how long it takes clients to settle invoices.
All this will help you to create a cash flow forecast which sets outs how much cash is expected to enter and exit the business during future periods.
A balance sheet shows the financial health of your business at a given point in time. It includes the business’ assets, liabilities and owner’s equity. This helps you to understand how much your business owns compared to how much it owes and to what extent you can pay your debts.
Management accounts may also provide deeper analysis of specific areas of the business or non-financial information.
For example, they may concentrate on the performance of a particular project, product, location or department. They may also include employee numbers, productivity levels, volumes of unit sales, customer complaints, numbers of new/lost customers etc.
In addition, management accounts may include external data, such as industry averages or general market conditions.
Need help with your management accounts?
Management accounts prepared by your local TaxAssist Accountant will arm you with the information you need to make the best decisions about where to take your business.
TaxAssist Accountants can help you with the right advice about management accounts to support your business. Call 0800 0523 555 or complete the online enquiry form to arrange your free initial consultation.
Date published 8 Jun 2022 | Last updated 15 Jun 2022This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.