Management accounts are not a legal requirement for companies, neither is there a set way to prepare them. They are however highly valuable tools when it comes to getting a clear picture of the financial position of your business, and in making strategic decisions.
What are management accounts?
Management accounts are a type of financial report. They provide insight into the financial performance of a business. The reason they are called management accounts is because they are used by managers and business owners to support decision making.
Generally, management accounts will be produced monthly or quarterly. The more often they are produced, the more refined your ability to keep up with how you’re doing, and the better your chances of detecting issues and getting on top of them early on.
There is no formal requirement to keep management accounts, and no standard process for producing them. Whilst there are guidelines as to best practice and you’ll find plenty of recommendations as to how to keep these accounts, ultimately the structure is down to your personal preference and should be based on the information that is important to you and your team.
Why should I keep management accounts?
Management accounts turn financial data into useful information that you can use to make strategic decisions. Here are some of the top reasons why you are likely to benefit from keeping management accounts:
Management accounts help you keep a check on business growth
When you have management accounts prepared regularly, it allows you to closely monitor your financial performance, and your business growth. You’ll be able to see how many new clients you’ve taken on, how your turnover has increased, and also how you’ve improved your profits.
Management accounts help you plan for the future
Management accounts allow you to see patterns in income and cash flow. This means you can accurately forecast future revenue so that you can decide whether to invest in, for example, more staff, new equipment or alternative premises. You may also detect seasonal variations, which will allow you to make plans to boost income during the slower months.
Management accounts can help you gain funding
If you are seeking funding or investment, a set of well-prepared management accounts will support your business plan. Investors will always appreciate management accounts, as they will help reassure them of your financial position.
Management accounts can help improve cash flow
When you have a clear picture of which of your clients are taking time to pay, you can take steps to improve your credit control processes, or make decisions about whether to offer credit in certain circumstances. Conversely, with clarity on which of your clients are good payers, you could consider setting up loyalty and rewards programmes.
What is the difference between management accounts and statutory accounts?
Both management accounts and statutory accounts use data from your income and cash flow statements and your balance sheet. But it is the way they use this data that makes them different.
Statutory accounts provide a factual, annual snapshot of your company’s financial information. They follow a set format, allowing shareholders and HMRC to view your overall expenditure. They are required by law, and must be produced and submitted annually by all limited companies.
Management accounts, on the other hand, are for internal use. They are more detailed than statutory accounts, produced more regularly, and provide helpful insights into business performance.
What should management accounts include?
Your management accounts should suit your own needs. Typically, you may wish to include:
Key performance indicators (KPIs)
KPIs are a set of goals against which you measure performance over time. They might be financial goals, such revenue or profits or improved cash flow, or they may be performance related, such as sales leads or mailing list sign-ups.
Profit and loss
Management accounts allow you insight into whether you are operating in profit, or making a loss. They make it possible to compare monthly income and see a breakdown of where it is coming from. You’ll be able to see where most of your expenditure is going, which products or services are making the most profit, and which departments are performing best. You’ll also be able to see if you are setting realistic targets.
Cash flow position
Being able to see your cash flow position allows you to budget ahead and make investment and funding decisions. Management accounts let you see patterns in your cash flow, such as times of the month when you have plenty of cash at hand, and those when you don’t. This information will help you identify gaps and look at what might be causing them, such as late payments or large outgoings, so that you can take steps to even everything out.
The balance sheet shows a picture of the net worth of your business, setting out your assets, liabilities and equity. Management accounts will let you see how this information has changed over time, and whether you are generating a good return on investment.
Looking for assistance with management accounts?
At Office Assistants, we work closely with our clients to produce management accounts that are geared towards helping them make strategic decisions, and highlighting areas for improvement.
If you’d like to discover how management accounts could empower your decision making and make a difference to your business, you are welcome to get in touch.