When it comes to management accounts, the most common question we accountants are asked is “are they mandatory” followed all too often by, “if they are not mandatory, why should I bother to produce them?”.
While they are not a legal requirement, those companies that choose to prepare management accounts find that it not only helps to maintain healthy accounts, it provides them with vital insight to aid strategic decision making and improve performance.
If you have an ambition to grow your business, no matter how large or small, then a regular set of management accounts will arm you with the insight you need to improve profitability and avoid any financial roadblocks along the way.
Management Accounts in a Nutshell
Management accounting is the practice of producing regular financial reports to gauge business performance and to avoid financial pitfalls. These reports are designed by management, for management to provide a snapshot of how well the company is performing against a set of predefined goals. This valuable information highlights areas for improvement and development so that management can focus their efforts and make smarter business decisions.
Unlike statutory accounts, management accounts are for internal use only, therefore there is no set format to adhere to. They can include whatever data is useful to the company and their frequency is dictated by business needs, usually being produced on a monthly or quarterly basis. At the very least, they include a cash flow forecast, a profit and loss statement and a balance sheet.
Management Accounts – What Can They Do For Me?
The fundamental thing to understand, beyond the dictionary definition, is that management accounts are future focussed. Yes, they are beneficial in avoiding immediate cash flow problems and promoting good accounting practices, but their key value lies in providing a deeper understanding of your business in order to grow. Essentially, it’s all about improving your bottom line, and what company, large or small, doesn’t want to do that?
If you have any ambition to expand your business or increase profitability, then it’s essential to be well acquainted with your numbers. The data you gather should be presented in a clear, concise way that is meaningful and actionable. As well as providing a snapshot of your current financial position, it should also make comparisons to past performance to inform your strategic decision making.
It’s also worthwhile mentioning that good management accounts can be invaluable when it comes to securing funding. It provides a solid backbone to your business case that will help to convince potential investors.
The absence of regular management accounts, can be likened to captaining a ship without a compass – sure, you may have a rough idea where you are, but you cannot be pinpoint precise, and crucially, there could be icebergs up ahead that you cannot see. In the absence of dumb luck, it will take you far longer to get where you need to go, if indeed you get there at all.
Naff analogies aside, without an accurate picture of your financial performance, you are operating on the basis of guesswork. At best, this may cost you money and missed opportunities. At worst your business could succumb to the competition and even face financial ruin.
As in most disciplines, the devil is in the detail. The level of detail you include in your management accounts and how you analyse that detail can make the difference between moderate and considerable success. Successful businesses scrutinise the detail, they analyse the numbers over time to tell a story. This empowers more effective decision-making and helps them to gain a competitive advantage.
Be in no doubt that you have competitors out there that regularly prepare management accounts, own their numbers and are making better decisions for it.
Management Accounts – What Do They Look Like?
When deciding on the content of your management accounts, remember that it only has to work for one audience, that is you and other key decision-makers. In a small business, it may well be you alone, or a handful of people – it is no less valuable.
Your report should be geared up to provide the information you need to improve your performance and forecast confidently for the future. Ensure that whatever data is captured works for you and is fit for purpose – you are too busy to create reports for reporting’s sake.
Unlike statutory and year-end accounts, your management accounts should drill down into more detail about your current performance and provide comparisons and analysis. As a starting point, you should consider including the following elements.
Profit and Loss Report
In the midst of trading, with cash flowing in and out of the business, it can be easy to lose sight of exactly how much money you are making. A Profit and Loss Report (P&L) sets out how you have been trading over a set period of time, be that per month or per quarter, and shows how profitable that period has been.
It includes information such as sales revenue, cost of sales, operating expenses, net profit and net/gross profit margin. It can be split to show profitability by department, product, client type, region – whatever you find most insightful. This information can be compared month on month, or year on year, to identify trends and enable you to repeat your successes.
There are many free P&L templates available online, but if in doubt, professional accountants can advise on what will work for you.
Cash Flow Statement
An understanding of your cash flow and liquidity is fundamental to any business. By incorporating it into your management accounts, you encourage good accounting practice and will avoid any major cash flow problems.
With some simple analysis, your cash flow data can work even harder for you. For example, are there recurring cash flow problems within your business, if so how often and from where do they originate? Do operating costs differ from department to department, if so why? Measured over time, the data will shine a light on areas of improvement so that you can budget more confidently across the business.
Your balance sheet is your ‘statement of financial position’, and sets out your company’s assets and liabilities to establish its net worth (or ‘owner’s equity’).
Viewed as part of your management accounts, the balance sheet can help to inform debt and asset management long-term, for example, how to increase rates of return.
Key Performance Indicators (KPIs)
KPIs are not only for large corporations, they can be a powerful tool for businesses of any size. Their purpose is to show whether your business is moving in the right direction so that you can take appropriate action. A financial health check, if you like.
A set of well-thought-through KPIs will help to focus your efforts, remain consistent in your outlook, and make effective decisions. They also provide a clear roadmap for every department or division within your business to follow, which has the added benefit of being a motivator for success.
A limited company should aim to have at least three to four performance measures that are easy to track and benchmark. Here are just a few examples of some common measures included in KPIs:
- Sales turnover
- Sales conversions
- Return on investment for marketing activity
- Client retention and repeat business
- Stock management
- Debt management
- Net/Gross profit margin
Your set of goals could include all or none of the above, the point is to make them meaningful to the nature of your business and relevant to your ambitions.
When deciding on your KPIs ask yourself the questions – What does success look like for my company? What needs to happen to achieve that success? What are the key drivers? The result will be a set of clear and measurable KPIs that will help keep your business on track.
Improve Your Accounting and Financial Performance With Hayhursts
For many business owners, to produce management accounts may seem like one job too many, and for valid reasons. They may not have adequate accounting procedures or the in-house skill required to produce detailed reports. However, with a little investment in professional accounting services, even the smallest of businesses can reap the benefits that a regular set of management accounts can provide.
At Hayhursts, we believe that your ambition shouldn’t be limited by your company’s current size or level of accounting expertise. We can help your limited company to establish an efficient and watertight accounting system with our outsourced accounting services, to give you greater control of your finances. We can also provide valuable advice on how to present management accounts, and what information to include to help drive your business forward.
With our advice and expertise as a solid foundation, you can gain greater knowledge and insight into your financial performance. As the saying goes, knowledge is power, and management accounts can empower you to make the best decisions for the future of your company.
Call us today for a friendly, no-obligation conversation to find out more.
Management Accounts – Frequently Asked Questions
Are Management Accounts a legal requirement?
Unlike statutory accounts, management accounts are not required by law.
How often are management accounts produced?
This is entirely down to how often they are required, be that monthly or quarterly basis, or even weekly. It is entirely at the discretion of the management as to how often they are produced.
What’s included in a set of management accounts?
The content of management accounts can be designed to suit the requirements of the business, to show progress against key performance indicators (KPIs). The cornerstones of any good management report are a profit and loss report, a cash flow statement and a balance sheet.
Who sees a company’s management accounts?
Management accounts are for internal use only, although they can be shared with investors or shareholders at the discretion of the owners.
What is the difference between management and statutory accounts?
As the name suggests, statutory accounts are a legal requirement. All limited companies must prepare statutory accounts at the end of each financial year. It must be approved by the board of directors, made available to the shareholders and filed with Companies House within a prescribed timeframe.
For a deeper look at the differences between management accounts and statutory accounts, please see our useful article Statutory Accounts vs. Management Accounts – What’s the Difference?