Management accounts are a compilation of financial reports that show the performance of a business. Although they are not a mandatory report that needs to be completed as part of a company’s statutory compliance, they are an important and valuable tool for decision makers. Management accounts will allow you to make informed changes to your business, whether that is to rectify poor performance or to maximise on opportunity. Management accounts are typically produced monthly or quarterly, and because of this, one benefit of using them is that it will allow for much faster reactions to be implemented than relying on year-end reports which only summarise a business performance once a complete fiscal year has ended.
What are management accounts used for?
Management accounts are tailored to each individual business’ needs and track their chosen key performance indicators. They are essential for ensuring that a business is running to plan, whether that means making enough profit or controlling business expenditure. In addition to keeping track of how much money the business is making or spending, you can include much more granular metrics such as:
- Measuring the gross margin percentage which will allow you to decide how you can improve profits
- Establish your break-even point to understand how much you need to make to sustain the business
- Control your stock levels including seeing how often you need to order stock and if any stock is wasted
- Manage the working capital cycle to better control your cashflow from debtors and creditors
- Compare repeat sales to existing customers vs first purchases by new customers
- Assess average sales value to spot opportunities to upsell
- Help you track regions or branches which are most profitable for your business
These are just a few examples and by no means an exhaustive list. However, this should illustrate the numerous ways that management accounts can be used to help you run and improve your business.
Who uses management accounts?
Management accounts are not just used by business owners but can be useful for various other stakeholders who have a vested interest in a business. including:
- Non-executive directors
- Investors and shareholders
- Banks and other lenders
- Tax Planners
Anyone who may be a decision maker or have influence over how a business is run should use management accounts.
How do you create management accounts?
There is no fixed method in producing management accounts because it will be entirely dependent upon your own business needs and goals. The first thing that needs be done however is to decide what your key performance indicators (KPIs) should be. If you’re unsure on how to determine these, feel free to speak to one of our accountants who can work together with you and provide guidance.
Alongside your KPIs, there will be some standard accounting reports which include:
- Profit and loss statement
- Cashflow statement
- Balance sheet
These are core reports and are essential for providing you with the facts and figures of the business performance. They can be easily pulled from your accounting software, provided by your accountant, or supplied by the finance department. By themselves, they can be difficult to understand, notice anomalies or see trends so you may want to convert them into graphs and charts as well for a visual representation.
An executive summary should be included and is an integral part of management accounts because it contains the analysis of the reports. It is what puts into words the reasons behind the numbers. It should also include action points that are to be taken in order to remedy poor performance or to seize opportunity for growth. There is no point in producing management accounts if they will not be used to optimise the business.
What are the benefits of management accounts?
As there is no legal requirement for companies to produce management accounts, it is often smaller businesses which fail to use them, and usually due to a lack of understanding on what the benefits are. There are many misconceptions that prevent them from accessing the value of management accounts such as believing they are not necessary for small businesses, that they will take too much time from the business to consider, or that they will be too expensive to enlist an accountant to help them to produce. However, smaller businesses stand to make a greater impact if they are well-informed on how to grow their business. Nor do management accounts have to take too much time or be costly with modern accounting software readily available, such as using Xero or Quickbooks, which allow you to easily extract most of the key reports.
Practical benefits of using management accounts include:
- Receiving timely information. This can be particularly useful when applying for loans from banks or other lenders. Raising finance is difficult at the best of times, but even more so if your financial reports are out of date and do not show the current state of your business. Management accounts will provide a more detailed picture of business earnings and help you make realistic forecasts.
- Allowing you to take control. If your only gauge in how your business is doing is a gut feeling, then it can be hard to take control of the situation. Management accounts will show you where you can cut costs and where you may need to increase margins.
- Helping you grow your business. Once you have been using management accounts regularly, you’ll be able to identify trends over time. Perhaps certain products are more popular than others which will let you increase stock levels or diversify into complementary products, or perhaps certain locations are busier than others which may mean investing in more staff to keep up.
- Improving your cashflow. Even if your business is doing well, an unpredictable cashflow can be highly disruptive and can lead to quick descent into losses. Management accounts can show you when to save up for larger annual purchases so that you’re not scrambling to find the funds at the time, or when you can spend more to plan for busy seasonal trading periods.
- Enabling efficient tax planning. Being well-prepared for your corporation tax bill before the year-end will help you avoid nasty surprises. An unforeseen business loss may mean being unable to take out as much dividends as you may have wanted to, yet conversely an unexpected business growth may also bring a much larger tax bill than anticipated.
What is the difference between management accounts and financial accounts?
There are a few differences between management accounts and financial accounts, but they are often confused because both rely on the financial figures of the business and may share the same types of reports. The differences between management accounts and financial accounts include:
- Financial accounts are mandatory compared to management accounts which are optional. Financial accounts are a legal requirement and must be submitted to HMRC and Companies House as part of your duties as a limited company (find more information on how to submit financial accounts here), whereas management accounts are a tool that businesses can use to improve their success, profitability and growth.
- Financial accounts are completed annually whereas management accounts are produced regularly. Management accounts are most useful when created and reviewed either monthly or quarterly to allow for changes to be made within the financial year.
- Financial accounts are provided for external parties, but management accounts are predominantly for the use of internal stakeholders. Your financial accounts that are submitted to Companies House can be reviewed by anyone publicly, but more detailed financial accounts are only submitted to HMRC and are private. Management accounts on the other hand are intended for those who are able to make decisions regarding the business or influence decisions.
- Financial accounts require specific reports in a set format, but management accounts will be much more flexible and will include your own KPIs. As mentioned above, an executive summary should, which is arguably one of the most important components of your management accounts but it does not make up part of your financial accounts.
Management accounts are one of the most powerful tools a business owner can utilise to achieve growth, as well as make informed decisions to streamline operations and make running a business more efficient. For information on our management accounts service please visit our service page. If you’re ready to get started, contact us now on 01865 24 55 11 or through the contact form below.