Management accounts are financial reports produced for business owners and managers, usually monthly or quarterly, they usually include a profit and loss report and a balance sheet. Management accounts are similar to year end accounts but are less formal and are personalised to the user’s requirements. They will put you in control of your finances and support the growth of your business.
They are called management accounts as they’re typically used by business owners to inform strategic decision making. They are produced monthly or quarterly to give accurate insight into business performance which allows business owners and management to make informed and timely decisions and actions.
Management accounts are not mandatory, they don’t have to be filed with HRMC, and are only used internally. When producing Management accounts, your company does not have to follow GAAP guidelines (or FRS102), however the accounting principles still remain in relation to these standards. You can choose exactly what you want to segment, therefore it provides a more specific focus on certain areas of the business, this way you can hone in on the details and really analyse the key drivers of your business.
What makes an effective set of management accounts? Management accounts are bespoke to your business, and over time you may change what you include in order to formulate the most useful approach for you and your business. It is essential that management accounts are accurate, there should be no discrepancies in terms of reporting, this is since these systems evaluate a company’s result at any given time. Each company’s management accounts differ, and since there aren’t any guidelines and rules that it should follow, there isn’t a strict checklist of what it should include. Below are some key points to take into consideration in order to create an effective set of management accounts -
- They need to be timely – completing management reports as soon as practically possible after the period end means that you can respond swiftly and drive actions.
- You need to have clear budgets that the actual performance can be compared to, and variances measured for each period – both for the month/quarter, and year to date. Regular variance reporting and analysis provides invaluable insights into the business performance and factors that impact this.
- It is essential that you report an accurate and true Gross Profit – ensuring that all costs and sales are reported in the correct period, and that the right costs are reported in COGS. Find out more on how to report realistically.
- If you’re getting monthly fluctuations in Gross Profit, there could be several reasons behind this, this article includes some useful tips on Gross Profit fluctuations.
- It is essential that management accounts include a full accurate balance sheet – this gives a picture of the real financial position of the company including liquidity and liability commitments. With tax liabilities increasing in 2023 and some volatility in the general markets, it is vital that the balance sheet is reviewed each month to ensure all the management team and directors know the financial position of the business.
- Cashflow statement – this provides a statement of where cash has been consumed or generated throughout the business in the period and a key document that helps management teams and directors understand where the profit generated differs from the net cash flow in the period, and how the drivers of cashflow can be manipulated to improve the business’ cash position.
- Ratios are a powerful management tool to assess the performance and risk profile of your business. Some key ratios to include are: Profitability, Liquidity and Risk.
Why are management accounts important?Management accounts are among the internal reports which business owners and managers use to run the organisation. They help to make predictions about future growth and profitability of your company. Managers are no longer satisfied with a financial report, as they don’t provide the level of insights and intelligence that management reports do, to really push your business to the next step. They are the key for better and more proactive decision-making – from timely management accounts you can learn almost in real time what works, and what doesn’t. It enables you to discover reasons for poor performance and take corrective actions to avoid the same thing happening again in the future. Not doing management reporting means you could be missing out on key information which leads to poor decision making.
Please note: This article is provided for information only and was correct as at time of writing (14/12/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.