Management Accounts – what are they and why would a business need them?
Management Accounts – what are they and why would a business need them?
Preparing management accounts is a valuable habit for organisations of all sizes and across all sectors. It helps business owners and senior management teams gain business-wide insights into their past, present and future financial position.
Whether management accounts are prepared on a monthly or quarterly basis is a business decision – but in times of both growth and uncertainty they add value.
So, what is a monthly management pack made up of and how does it work?
What are management accounts?
Management accounts or management accounting is the process of preparing and producing financial reports for managers and business owners.
Most companies produce management accounts so that they can keep an eye on the financial health of the organisation. Preparing management accounts is good business practice, particularly as it gives a snapshot of your business position and can act as a benchmark to compare past and future performance.
Up-to-date, accurate business information is vital to sustainable growth. Both business owners and leadership teams need to make decisions based on evidence, they can’t simply rely on their intuition. They need facts and figures to determine the reasons behind underlying problems, to assess the different options for taking action and, if necessary, changing course.
The importance of producing management reports as soon as possible after the end of each month will ensure the provision of key information that can be discussed in board meetings and used to plan business strategy. Monthly management reports can also inform sales targets and budgets and enable managers to re-allocate resources effectively.
How often are management accounts prepared?
Reports are usually produced on a monthly or quarterly basis. A key advantage of these reports is that they can be more personalised to your individual organisation’s requirements unlike the formal year-end financial reporting process. Whilst there is no set rule on when management accounts are prepared, they are usually produced on a regular basis dependant on their use and the size of the business.
What makes management accounts different from statutory accounts?
Whereas statutory accounts are a legal requirement for limited companies in the UK to submit to Companies House every year, Management accounts, on the other hand, are for internal use and there is no set format. In fact, they are most useful when they are tailored to the needs of an individual business and cover what is most important to the leadership team.
However, if management accounts are prepared on a regular and consistent basis its easier to use and managers will find it easier to monitor performance over time.
What is included in management accounts?
There’s no set format for producing monthly management accounts. What’s included will depend on the lifecycle stage of the business, its sector, goals and strategy. Generally, as a minimum, management accounts will cover the following:
Key performance indicators (KPIs)
Your KPIs are likely to include analysis such as department, product line and even individual teams. You may also prepare a cost of sales report showing expenses such as materials, production and marketing costs, some companies want reports detailing customer billing/monthly subscriptions. These key performance indicators are an effective way to monitor whether your business is performing to a level that meets your current long-term goals.
Profit and loss statement
This details revenues, costs and expenses. This is all key information to help you understand the company’s current financial position. It helps answer questions to assist with making valuable decisions for instance;
Are we making money?
How are we performing against budget?
How does our current financial position compare with the same period last year?
Profit and loss statements are an accurate way to predict business performance against monthly, quarterly and annual forecasts. Plus, it helps to understand exactly where your business is making money so owners can proactively invest more in ‘money-making’ departments and cut expenditures where needed.
However, key to all of this is that the data available will only be as good as the data that’s been input, therefore the importance of bookkeeping and bank reconciliation on a regular basis has never been more important.
Cash
Even a profitable companies can go out of business if they run out of cash to pay the bills. Visibility of your cash position (on a regular basis or at least a monthly basis) will help inform decisions around budgets, investments and funding or borrowing needs.
Balance sheet
The balance sheet is a snapshot of the health of your business at a particular point in time. It normally consists of:
Assets: fixed assets, current assets, stock, debtors, cash, and prepayments
Current liabilities: creditors, taxes, other liabilities
Sources of finance: debt, net assets, and shareholders’ funds.
Preparing your monthly management accounts
It’s not necessary to follow any set procedures, rules or processes when preparing management accounts. However, it is good practice to be consistent to enable historical comparisons. Management reports are of most value when they contain details pertinent to the organisation and the information is produced in a user-friendly, accessible format for use by colleagues across the business.
Some businesses like their accountant to prepare an executive summary on the first page of the management accounts. This highlights the important monthly facts and figures, any significant changes or red flags. For example, it may include net profit margins, turnover ratio, or losses incurred. It may also include a department summary, so leaders can monitor and compare performance across the business.
How do businesses benefit from monthly management accounts?
Preparing accurate and timely management accounts brings valuable benefits across the business, not just in the finance team. The insights from these reports are key to running and monitoring your business and can include the following examples…
Insights into effective management, resource planning and strategy
Enable managers to assess if goals and targets are being met
Help with price modelling and product profitability
Give a deep understanding of where cash is being spent, business assets and debt position
Inform budgeting, financial forecasting and cost analysis
Provide reassurance to banks and investors that you have a firm grasp of your business, should you be looking at borrowing money for the business.
Here at Kennedys Accounting we offer management accounting on a monthly or quarterly basis or even ad-hoc if required.
Talk to your accountant about this for your business or if you don’t usually work with us here at Kennedys Accounting, we can still complete the work for you, as well as providing both Virtual FD and Non-executive director services.