You have probably heard the term “management accounts” before. But can you tell what it means exactly? Is it the same as financial statements or just accounts? What do they consist of and what are they used for? And finally, is it worth investing your time and money in preparing them on a regular basis?
What is the difference between management accounts and financial statements?
Management accounts consist of a set of financial reports, on the basis of which company directors make important business decisions. Usually some kind of analytical reviews will accompany the set of management accounts. They are quite often confused with the actual financial statements, also called statutory accounts. The main differences between the two are as follows:
- Purpose – the main purpose of financial statements (statutory accounts) is to report on the company business performance to its shareholders and official bodies, like Companies Registration Office or Tax Office. Management accounts focus more on company operations and analyzing efficiency and profitability of the business, so they will be used mainly internally by the company management.
- Frequency – financial statements are produced once a year in order to comply with the reporting and filing obligations. Management accounts can be produced more often, usually on a monthly or quarterly basis, and can be extracted straight from your accounting system, thus they will always contain the most up to date financial information.
- Level of detail – annual financial statements would only focus on the high-level insight into your business finances and relying on them while making business decisions can be quite risky. Management accounts, on the other hand, drill down much deeper into the financial figures and enable company directors making informed business decisions.
Management accounts consist of financial reports, on the basis of which company directors make important business decisions
What do management accounts consist of?
Management accounts include financial reports, which do not have any pre-defined format, as opposed to annual financial statements, which have certain legal requirements. They can be prepared using traditional Excel spreadsheets or a modern cloud accounting software, like Xero for example, which is very time efficient. The major reports included in a set of management accounts should be:
- Profit and Loss Account – this is a valuable statement which gives a lot of very important information about the profitability and performance of the business. It should also show comparisons of actual revenues and costs against the budget and prior periods. Some analytical review and commentary should accompany the report in order to provide a relevant context and make it easier for company directors to draw conclusions.
- Balance Sheet – this is a statement of company financial position, it shows the value of assets, liabilities and shareholders’ equity at a certain date (usually the last day of a month or quarter). The balance sheet tells if the business has too much debt or if it generates enough cash, it also shows the total value of fixed assets and investments. It will state how much money your customers owe you and how much your company owes to its suppliers.
- Cash Flow Statement – as opposed to the profit and loss report, this statement will show your cash inflows and outflows and reconcile the opening and closing cash position with bank statements. This is an extremely important report, for small businesses in particular. It will tell you if your business has enough money to pay all the financial obligations and how much more cash it should generate to meet these obligations. It should be paired with a cash flow forecast and updated on a regular basis. Without looking at the cash flow you will never have proper control over your business money.
The main purpose of management accounts is analyzing the efficiency and profitability of the business
What are the benefits of producing regular management accounts?
The main purpose of management accounts is analysing the efficiency and profitability of the business. They are used mainly internally by the company management in order to make appropriate and informed business decisions.
- Once produced on a regular basis, they will deliver extremely useful information which can be studied and discussed during monthly or quarterly business review sessions and strategy meetings. On the basis of this information, you will be able to effectively plan for the business growth.
- By drilling deep into the financial information, you will have much better control over how your business is performing. You will be able to identify profitable products or services, identify unexpected cost increases and take relevant action, monitor sales volumes and stock levels, make appropriate recruitment decisions, plan your tax payments and many more.
- The vast majority of start-ups fail because of poor cash flow control. By implementing proper and regular cash flow reporting and forecasting you can eliminate the risk of business fiasco, especially in the early stages of the existence.
- By having real time insight into the business performance, you will be able to react immediately when noticing unexpected costs fluctuations. Profit and loss analytical reviews are extremely helpful in identifying issues like this.
- It’s not uncommon that external bodies, like lending institutions, would request up-to-date management accounts when evaluating your business loan applications. Showing them a healthy set of accounts will definitely increase your chances of getting the loan approval.
Talk to your accountant today!
If you haven’t implemented any management accounts in your business yet, it’s never too late! Start by talking to us today and see how greatly your company can benefit from having regularly produced management accounts and analytical reviews. You will be amazed to see how it can help your business grow and perform better.