As accountants, we often hear the following two questions – “what are management accounts?” and “how would management accounts help my business?“.
In order to answer these common questions and to give you more insight to the value of management accounts for your business we have created this post.
As a limited company, you must prepare a set of financial accounts every year to submit to Companies House and HMRC. Aside from meeting a legal requirement, this is a good opportunity to review your business’ financial position. But to really keep on top of your numbers and get a clear picture of your business, you’ll also need to prepare management accounts periodically. These provide key financial and statistical information for both limited companies and sole traders, giving you better visibility of how your business is performing and allowing you to make informed and timely decisions throughout the year.
What are management accounts?
Management accounts are a set of summarised accounting data prepared and presented periodically (e.g. weekly, monthly or quarterly). When it comes to the information they include, there’s no one-size-fits-all approach. To be most effective, the information should be tailored to your business, so you’ll need to work out what essential data the management team or individual proprietor needs to see in order to make sound financial decisions. These are some of the types of information that management accounts commonly include:
- Executive summary
- Balance sheet
- Cash flow statement
- Income statement
- Actual turnover, gross margin, overheads and operating profit
- Key performance indicators
- Capital expenditure
- Corrective actions and contingency plans
What are the benefits of management accounts?
Whilst not required by law, management accounts are a powerful tool to run your business more effectively and plan for the future. Here are some ways in which they can help:
Not only are they produced on a more frequent basis, management accounts also often contain details that would not necessarily be included in your annual accounts. For example, you might break down cost by business area, or revenue by product or service lines. This gives you greater insight into what’s working well in your business and areas that need to be addressed, allowing you to make decisions and take corrective actions in a timely manner.
By monitoring your numbers and resolving queries regularly throughout the year, you’ll also be in a much better position at year end and there should be no big surprises.
They help you to keep an eye on the money coming in and going out of your business, enabling you to spot problems quickly. This makes it easier for you to prevent cashflow shortfalls, for example by planning expenditure or seeking external funding.
If you’re looking to raise funding, then lenders and investors will want to see up-to-date management information. By producing accounts on a regular basis you’ll be able to meet this requirement and demonstrate that you have a firm grasp on your business, increasing your chances of securing the funding you need.
These are just a few of the benefits that management accounts have to offer. Without them, it’s likely that you won’t have enough insight into your business to build it successfully. If you take the time to regularly prepare and review management accounts, covering the information most important to you, you’ll be in a strong position to take your business forward.
As management accountants, Cottons can be with you every step of the way, providing more up-to-date information and advice that could help you and your decision based on the most recent – as opposed to relying on a snapshot of your accounts and business from months before.