The Power of Management Accounts

Management accounts show current financial information and key data about the business, which typically, are not drawn up until the year end - or not at all in some cases. Management accounts arm the decision makers of the business with the information they need in order to drive the business forward and steer it in the right direction.

Let’s take a look at what they consist of and how they can be an essential tool for any ambitious business owner.

What do Management Accounts show?

Management accounts are not a legal requirement and therefore there is not a standard format for how they should look. Instead, the components of management accounts are driven by what information the managers of the business need and want. They can cover whatever period needed and be as complicated or as simple as you want.

Generally, you could expect to see these sorts of items in a set of management accounts:

• A summary, which will usually contain some Key Performance Indicators (KPIs) and highlight the main issues
• An action plan outlining any remedial measures to be taken
• A profit and loss account for the period. The comparatives are likely to be either the cumulative position against the budget or the equivalent period last year
• Balance sheet showing the working capital position
• Management accounts tend to focus on historical information, but they may include some forward-looking data, such as a budget and/ or a cashflow forecast

Depending on what information is available and required, management accounts may provide deeper analysis of specific areas of the business or non-financial information.

For example, they may concentrate on the performance of a particular project, product, location or department. They may also include employee numbers/ productivity levels, volumes of unit sales, wastage levels, customer complaints, numbers of new/ lost customers etc.

The management accounts may provide external information, such as industry averages or the general market conditions.

The Purpose of Management Accounts

The year-end statutory accounts are intended to meet the requirements of official bodies such as HM Revenue & Customs or Companies House, shareholders and other stakeholders such as customers and suppliers.

In contrast, the only intended users of management accounts are the managers of the business. The purpose of management accounts can be broken down into five key areas:

Analysis

Management accounts should provide some analysis of the information - by way of commentary and statistics. Managers of a business shouldn’t be wading through reams of data - the key headlines should be summarised in the management accounts.

Analysis should be provided on how the performance of the business to date compares with previous periods or the equivalent period last year. If budgets are being maintained, the cause of any variances should also be explained.

Risk

The risks identified by management accounts can be far-reaching and could highlight things such as:

• how sensitive the business is to a price-increase or other “what if” scenarios
• how dependent the business has become on a particular customer/ supplier
• a competitive market
• a future cashflow shortage

Strategy

Management accounts are there to provide managers with the tools they need to make decisions about where to take the business. It could bring to light the need to branch out into other products, services or locations. Conversely, departmental management accounts could show that a particular site or product needs to be axed because it’s not performing well.

The non-financial information included within the management accounts could raise awareness of new legislation or rules that the business needs to accommodate for.

Planning

Once the strategy of the business has been identified, plans should be made on how this will be achieved. This could be the deployment of more staff, a different supplier for materials, more training, extra funding, etc.

Needless to say, an important part of planning is the use of budgets and cashflow forecasts; so that the managers of the business know what resources they have to hand.

Communication

Management accounts should show the information the managers of the business need. However, the information contained within them may also need to be filtered down to department managers. For instance, they may need to be made aware of poor performances so that they can take appropriate action or there may be departmental targets that need to be shared with them.

Other considerations

It seems fairly obvious, but it’s worth highlighting that a prerequisite of management accounts is the timely preparation of the business’ records. This should also mean that the business will be aware of its tax liabilities as early as possible and will avoid late filing penalties for accounts and returns.

We can help

Whether you choose to do none, some or all of your bookkeeping, we can help you choose the right bookkeeping solution, that will ensure you meet your statutory obligations but will also supply you with the data you need.

We can provide you with the following services:

• Assistance with selecting the right solution for your bookkeeping and reporting needs
• Bespoke training for your staff and you- or alternatively, we can take care of the bookkeeping for you
• Discounts on the purchase price of software
• Production of tailored management accounts that fit your needs

Management accounts prepared by your local TaxAssist Accountant will arm you with the information you need to make the best decisions about where to take your business.  Contact us today to find out more about management accounts and how they can benefit your business on 0191 374 1667

Date published 1 Oct 2013

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.