What to Incorporate in Your Management Accounts?

There are three significant financial statements in every business: the profit and loss (or income) statement, the cash flow statement, and the balance sheet. Collectively, these documents provide vital numbers and a detailed record of your finances.

But what do these numbers really indicate to you? Do they demonstrate how your business is growing? Do they show you that you constantly meet your forecasts? Do they show patterns in expenses that can progress your business planning?

To get the most out of these figures, many companies also create management accounts—a discerning, in-depth analysis of the data. Financial management reports aren’t mandatory, and there’s no fixed way to do them. But they’re very useful tools for going beyond the numbers to understand your recent performance and plan for the future.

What are management accounts?

Management accounts are a type of financial report that provides an understanding of the financial performance of your business. They’re called financial management reports because they’re normally used by business owners and management to inform strategic decision-making.

For the best results, management accounts are usually created monthly or quarterly so that you can more accurately estimate how well you’re doing and make appropriate course corrections.

Possibly unexpectedly, there’s no standard or ‘correct’ way to do them. Each set of management accounts will be exclusive to that business. Although there are examples of good practice and popular suggestions of what to include, the final structure of the report will eventually depend on what information is vital to you and your management team.

What are the advantages of maintaining management accounts?

Just as management accounts have no fixed format, neither are they compulsory. Still, it’s in your best interests to create them consistently because they turn your financial performance data into analysis you can take action on.

Here are just some of the rewards of keeping management accounts:

1. Track your growth. You can evaluate your management accounts monthly, quarterly, or yearly to accurately assess not just your financial growth but your performance as well. For instance, looking at your accounts receivable over time, have you evolved your client base from late-payers into on-time payers?
2. Prepare for the future. Observing patterns in income and cash flow means you can more accurately predict your future revenue or make allowances for unsure accounts. You might even spot recurring differences in cash flow so that you can plan for slower months in the future.
3. Stimulate funding. A good set of management accounts supports your business plan, and investors love to see them. You can move towards investors confidently, prepared to answer all their questions about your business performance, whereas failing to show any will generally result in a speedy ‘goodbye’.
4. Optimise your processes. When you are aware of your cash flow, you can make any needed enhancements. For example, if clients take a while to pay, you can develop your collection process or make other credit decisions rapidly. If you know which customers pay regularly, you can create loyalty programmes and attractive offers to incentivise them.

What’s the distinction between management accounts and statutory accounts?

Management accounts and statutory accounts mutually use data from your income statement, cash flow statement, and balance sheet. though they use this information in a different way.

A statutory account provides a clean and refined annual picture of your financial information. They use a generic format so that shareholders and the HMRC can see your spending as a whole. They’re a tick-the-box, required report produced once a year for all limited companies, focusing entirely on the numbers.

A management account is more for you. It’s a comprehensive, raw, and more regular look at your financial information, going past the numbers to disclose key insights about your business performance.

What should I include in my management accounts?

As already stated, management accounts are tailored to your business. Nevertheless, here are a few helpful suggestions for what kinds of information to incorporate. Over time, your choice of what to include may progress so that you can devise the most useful approach for you.

A strong set of management accounts will probably comprise:

1. Key performance indicators (KPIs): Every business has a set of KPIs—a list of quantifiable goals you want to attain within a specific timeframe. KPIs can be financial goals you want to achieve each month, like growth in revenue, gross profit margin, operational cash flow, current accounts receivable, or inventory turnover. KPIs can also be performance-based, such as the number of sales leads you want to reach. Write down your KPIs and then inspect them against the relevant numbers in your financial statements. Looking at your income statement, are you realising your revenue goals? Or, observing your accounts receivable on your balance sheet, are enough customers paying within the preferred timeframes? See where you’re doing well and look for areas of progress.
2. Profit and loss: At a glance, your income statement demonstrates whether you’re operating at a profit or at a loss. With a management account, you can delve deeper. Compare your income monthly: are you regularly overspending or underspending? Break your productivity down by department or location: which departments or branches are accomplishing the best? Compare your actuals to your forecasts: are you setting sensible profit targets or do you need to re-evaluate?

3. Cash position: Your cash flow is your lifeblood, so having a comprehensive understanding of it is vital for everyday budgeting, investment, and funding assessment. While your cash flow statement summarises the cash entering and leaving your company, your management account looks at this data to recognise trends. How long does it usually take to receive payments from clients? Which areas of the business have the largest operating costs? With a perception of these patterns, you can better anticipate the future by planning around higher or lower income months and distributing money optimally across the business.

4. Balance sheet: Your balance sheet delivers an overview of your net worth, showing your assets, liabilities, and owner’s equity. While a balance sheet concentrates on seeing the numbers balanced, a management account helps you look for deeper insights. Assessing your liabilities over time, how well do you manage debt? How rapidly do you turn assets into revenue? How well do you produce returns on investment?

Reading this, it might sound like a management account request to be exhaustive. But remember, your purpose is to produce only the most significant and valuable information and keep it focused, specific, and to the point. Only incorporate the information vital to your business, which might adjust as your business does. Going into too much detail or including all could turn this into a labour-intensive duty you’ll be reluctant to do, which beats the purpose. In short, make something that you’re happy reading, because that’s what you’ll be doing.

How can I use management accounts to get new funding?

For any business in the growth phase or any business looking to develop its cash flow, your pressing question is: how do I access new funding?

Having reliable, up-to-date management accounts is one of your tools. For example, if you’re looking for funding from a bank or investor, a good business plan supported by projections and accounts can significantly improve your chances of success, especially if your financial management reports are done frequently. Some lenders also allow a set of management financial overviews to give or extend credit terms, which can be a useful alternative if you’re still improving your credit score.

If you’re a small, fast-growing business, you might even consider creating a set of management accounts devoted to pitching for funding. Here, focus your KPIs and insights on demonstrating why you’re good for the venture.

Who should create management accounts? 

A qualified accountant can assist you with your management accounts since they’re skilled at making sense of numbers. They can help you inspect your financial statements and pull out data, patterns, or red flags valuable for decision-making.

Ideally, however, you should also play a key role in formulating the management report, since you know your business and its goals best. Relate your KPIs with your accountant, so they know what practical figures to analyse and forecast.

Low Cost Accounts can provide invaluable assistance in managing accounts by offering expert financial guidance and services tailored to your specific business needs. With their team of skilled professionals and extensive experience in accounting and financial management, we can help you streamline your financial reporting processes, analyse your financial performance, and make informed decisions to optimise your business operations. With Low Cost Accounts as your trusted financial partner, you can benefit from reliable and efficient management accounting services that support your business growth and success.