There is no legal requirement to produce management accounts but it is hard to run a business effectively without them. The concept is not new, yet many businesses are either unaware of the benefits or simply ignore them and rely on their annual accounts for financial information.
Statutory (annual) accounts report on the past performance of a business. They have to be produced by a certain date and in accordance with certain regulations and must be made available to HM Revenue & Customs and where applicable Companies House, directors and shareholders. The risk of businesses solely relying on their annual accounts is that they have little if any interaction with their accountant and so do not develop a relationship with them but more importantly it normally means that they are only looking at their performance once a year and typically several months after the accounting period has ended.
Management accounts provide timely financial and statistical information to business owners / managers so that they can make informed business decisions and take action to improve profits and cash flow, whilst at the same time reduce costs and risk. Management accounts are for internal use however are often a requirement if businesses have or have a need for external financial support or investment.
There is no set format for management accounts. The accounting needs of a business will vary according to its size, type and sector and the components are driven by what information the managers want and need. Management accounts are designed to benefit your business and as such are bespoke and somewhat dynamic which can evolve as the business grows. More and more common for those who are not good at or who don’t like looking at rows and rows of numbers, management accounts data can be presented in dashboards with charts and graphs.
We feel that management accounts are a vital tool for running any business. The frequency of them will vary but typically they are produced on a monthly or quarterly basis and as soon as possible after the period end. Whilst there is no set format typically a set of management accounts will include the following:
- Summary / Key Performance Indicators
- Profit & Loss Account – month and year to date
- Profit & Loss Account – vs prior period and year to date
- Profit & Loss Account – vs budget month and year to date
- Balance Shet
- Cash Flow Forecast
- Action Plan
This list is by no means exhaustive and a good accountant will listen to you and learn about your business to help produce information that will give you the information you need to run your business.
So what exactly can the use of management accounts achieve? We consider there to be five main benefits that could have an immediate impact on your business:
Good management accounts get to the point and provide accessible, useable data. No business owner wants to be knee-deep in unrefined statistics, so analysis of performance is essential. Trends should be highlighted along with explanations and relevant comments where appropriate.
Achievable goals and crystal clear strategy are vital for growth within business. Using management accounts to formulate medium and long-term action plans and objectives is a sure fire way to boost performance. Without effective strategy, your business risks losing direction.
Well-constructed management accounts can help identify risks before they become problematic, enabling contingencies to be put in place. Market fluctuations, potential cash flow problems and issues with customers and suppliers can all be quickly identified and avoided.
With risks identified and a clear strategy in place, plans for how to achieve your goals can be formulated. Management accounts can lay the foundations for key decisions relating to budgets, staffing, suppliers and training needs, as well as much, much more.
With improved clarity in the boardroom, communicating your vision throughout your business will become much easier. Productive staff thrive on clear, concise direction from management and high quality management accounts are a priceless commodity when establishing effective channels of communication.
Management accounts should ensure you are in regular contact with your accountant and getting help and advice along the way. It can be too late to see your accountant several months after the year end. If the business is doing well then management accounts can help with things such as tax planning and if it’s not doing well, help identify why and enable you to take steps to fix things. A good accountant will ensure that a client understands what the management accounts are showing and help them interpret the results.
Want to Learn More?
Unsure how management accounts could work for you? The Financial Management Centre has extensive practical experience of implementing management accounts in businesses of all shapes and sizes. Feel free to get in touch if you would like to find out more and look at introducing management accounts to your business.