What Are Management Accounts?
Management accounts are specifically made for your company to show the key information that you need to see. They are commonly produced on a monthly or quarterly basis to help you monitor and provide insight into your business’s performance and make impactful business decisions.
Compared to Statutory Accounts which you might be more familiar with, management accounts consider the specifics of the business such as the profits earned by each product. The reason for management accounts is in order to help understand the root of the problems and to find its solution and are often worked on actual, estimates and approximations instead of precise records. For businesses that are focused on more than just the finances, management accounts will provide information around the performance of the financial health of the business to help make the day-to-day and strategic decisions.
We often see many banks requesting management accounts as they provide valuable financial information which could act as a guarantee and assurance that your business is in a strong financial position, resulting in your business winning the loan.
We work with many different sizes of companies and management accounts are often the key to running and monitoring their business’s performance, being able to highlight key areas, looking at possible increases or decreases in advance results in proactive decision-making opportunities. The results are seen in you achieving your targets that are set out to be achieved at the start of the year. Management accounts can be the insight you were looking for to run your business to take it to its full potential and to reach your business aspirations.
Why do so few businesses have management accounts?
There are a number of reasons why:
- lack of interest
- never properly considered
- thought to be too small (but are not)
- assumed insufficient or inadequate in-house skill
- worried about the complexity
- perceived as unnecessary
- assumed unaffordable
- another job to do – too busy
- more numbers that you won't understand!
A very small construction business can still find a benefit from management accounts even if they are basic as they help business owners to start to get use to their numbers and from there, month on month, you will become more familiar with how your decisions are affecting your numbers.
Management Accounts allow us to dig deeper into your business and present the findings in a presentable and simpler manner where we can run through and explain what is happening in your business in considerable details. This raises loads of question with business owners that they have never discussed or thought about before and its exactly why management accounts are so powerful.
Who uses management accounts?
Management accounts can provide a benefit to many different people
- owners/managers - seeks improvement, analysis of performance, identifying risks and solutions.
- investors/banks/lenders - insight into the financial performance and health of the business - to see if their investment is likely to be safe.
- factoring/invoice discounting - insight to see if they will see a return of their money
- accountants - further analysis of the company's financials and ability to provide insight and accountability
- tax planners - to plan tax opportunities around the direction of the business.
The benefits of knowing your numbers
Knowing your numbers will allow you to:
- Understand whether your business is growing or shrinking
- Track trends over time
- Compare results to your expectations (as set in your budget)
- Compare results between years or different periods
- Identify areas of strength and weakness
- Measure your business efficiency
- Measure the value of your business
- Identify symptoms of underlying problems
- Measure your cashflow
- Make better business decisions
Why Produce Management Accounts?
Management Accounts is like a dashboard of car. What does your dashboard on a car tell you? How fast or slow you're going, whether you have enough fuel, water, oil. It is an indication of whether you will make it to your destination. It is the same in business. Running a business without management accounts is like driving a car in the dark.
Most business don’t know their profitability, margins or trends. So why should you? If you are able to measure something, you more often than not will automatically want to improve it. If we take your profit as an example, this is something you will want to improve.
There are several key objectives in financial reporting:
- To measure past performance as a basis for improving
- To avoid cashflow problems and manage liquidity
- To have future visibility
- To determine where to focus attention in order to improve profitability
What do you consider are the four or five most important measures you should have on your dashboard?These will be a little different in each business.
For example, if you’re a manufacturer, your most important KPIs might be:
- Gross profit percentage
- Cost of rework
- Work in progress days
- Debtor days
If you’re a retailer, your KPIs might be:
- Gross profit percentage
- Average client spend
- Transaction frequency
Whatever the top 4-5 are for you, they must be captured and reported on a regular basis. It’s important that you focus on a small number of KPIs, as the top 4-5 will drive most of your business improvement.
What Is Included In Management Accounts?
- Profit & Loss (P&L)
The profit & loss report shows the performance of the business during a selected period. It will show a summary of the income received and the types of expenditure that has been incurred during the period.
Management accounts are made to be unique to that company and the information shown will be different for each business. This is usually based on how your company is set up and the product or services you are selling. An example would be a construction business, they would like to see the profitability of each project.
The profit and loss produced for your company should therefore be bespoke to your company needs taking into account, the nature of your business, the level of detail required, the frequency of the reports and the layout. They are specifically designed for your company in order to provide insight into the running of your business highlighting areas of risks and good performance.
- Balance Sheet
A balance sheet shows the financial position of your business at a point in time and shows if your business is solvent (if assets are greater than liabilities). The balance sheet should be prepared with notes to help identify and explain key business ratios such as liquidity ratios, debtor days, inventory days etc to show and alert the performance of the business. In many ways, the balance sheet is more important than the profit & loss.
From the balance sheet, one of the areas we can explore is the summary of your business debtors. This is the customers who have not paid your business yet, we can see how much is owed, and for long the money has been outstanding. We can also show your debtor days which is the average days it takes for your customers to pay you and compare this against your credit terms. If your debtor days are higher than your credit terms this is a concern for your cashflow position and needs attention.
The balance sheet is divided into three main segments:
- Fixed Assets
- Current Assets
- Other Liabilities
Sources of Finances
- Net Assets
- Shareholder Funds
- Key Performance Indicators (KPI’s)
Depending on the industry your business is in and the nature of your work, there are specific ratios to provide you with greater insight into your business. We are then able to benchmark your KPI’s against your industry to see how you are performing compared to your competitors. KPI’s monitor the performance areas of the most interest in order to run your business to its full potential. It can determine which areas you are successful in and where improvement is needed
What you might include:
The P&L sheet details variances from the budget & the prior year. It can compare where you are over/under spending.
2. Departmental Analysis
You can create a departmental or segmental P&L account to gauge the profitability of departments or location.
3. Cost of Sales
This can include expenses such as manufacturing, production and materials.
4. Gross Profit Margin
Compare your actuals to what was forecasted for the period. This can be compared to lasts years to show how performance has change, where relevant.
What Kind of Businesses Need Management Accounts?
Management Accounts can be valuable for start-ups, however, it’s likely to be a simple set of reporting is all that is required as there isn’t much data to analyse at this stage. The areas we would cover are:
- Summary of accounts
- Profit and loss
- Balance Sheet
- Basic KPI’s of performance
This will provide basic insight into your business to help make informed decisions based on your current financial situation which is critical at this stage. Management accounts can help accelerate the growth of your business much faster as it helps make informed decisions based on your financials.
Now your business is growing, you need to be aware of what is happening within your business and looking at key indicators to assist with the direction that your business is heading. Keeping an eye on your income and expenditure will give your a better understanding of your cashflow position and whether you have enough money to cover you for the next 3 months for example.
We are not able to provide greater insight into your financial positions covering areas such as:
- Receivable and Payables
This is where we can provide you with much more detail into the specifics of your company. The reports will provide insights into:
- Key Performance Indicators (KPI’s)
- Accruals and prepayments
- Segmental/departmental analysis
- Variance analysis (actuals vs forecast/last years performance)
Businesses need insight into their business to show how they are performing, identify areas of risks in advance, finding the solutions and looking for potential opportunities to increase performance and profitability. Management accounts can provide an opportunity to see their business from a simplified and visual approach.
If you would like to know more about management accounts, or any of our other services please get in touch today.
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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