Not all accounting practices are solely for government compliance, such as management accounts. Unlike statutory accounts, they are optional and tailored to specific business needs, going beyond figures and formality.
What are management accounts UK? This article serves as a simplified guide for small business owners about these accounts, the whys and hows, and more.
What Are Management Accounts
Management accounts, or management accounting reports, are prepared monthly or quarterly and provide a detailed analysis of the business’ key financial statements (profit & loss, cash flow, and balance sheet) to arrive at crucial insights for running and expanding a business.
These accounts are optional, as they are not required by the Companies House or HMRC, and they follow no specific format. They are tailored to include information crucial to the managerial team, such as a detailed summary of the business’s financial and operational performance, paving the way for strategic decision-making.
Management Accounts vs Statutory Accounts
Both management and statutory accounts use data from the income statement, cash flow statement, and balance sheet, but they use this information differently.
Statutory or year-end accounts are annual formatted statements to meet government requirements. On the other hand, management accounts offer regular, detailed, and customised analyses covering any period, usually by month or quarter, to aid in business growth.
Whilst statutory accounts have specific recipients such as investors, HMRC, and Companies House, management accounts are more flexible. They can be produced for anyone with a significant stake, interest, or influence in the business, including owners, shareholders, board members, senior managers, accountants, tax advisors, investors, and more.
Why Produce Management Accounts
Many businesses do not use management accounts due to a lack of awareness, time, resources, and assumptions about complexity and cost, whilst some believe they are too small to benefit. However, consistently producing these accounts is in their best interest.
Management accounts equip the company’s decision-makers with the data needed to steer the business effectively, all to give them financial leverage. Below shows what are management accounts used for in business and outside.
Track Performance and Enhance Growth
Key performance indicators (KPIs) are crucial metrics for business performance. Regularly comparing management accounts helps monitor financial growth and individual performance, such as improving the timeliness of accounts receivables.
Control and Reduce Expenses
Management accounts help track costs accurately, whether operating or overhead expenses, identifying areas for expense reduction. Regular reports also streamline year-end accounting, potentially reducing associated costs.
Manage Cash Flow and Streamline Processes
Detailed expense tracking provides insights into spending patterns, facilitating better financial accounting management and resolving cash flow issues early on. Understanding cash flow also improves business processes, such as enhancing collection flow or developing loyalty programs for prompt-paying customers.
Plan Strategically
Management accounts reveal income and cash flow patterns, aiding in accurate revenue forecasting and strategic planning. They help identify underperforming areas and prepare for seasonal cash flow variations.
Make Informed Decisions
By identifying sales trends and other timely data, businesses can manage inventory effectively, consider diversification, or decide on expansion. Management accounts also help identify adverse trends in real time, enabling prompt corrective actions. This proactive approach supports better decision-making throughout the year.
Detect Fraud Early
Regular financial reviews through management accounts help uncover fraudulent activities early, protecting the business from significant losses.
Optimise Tax and Dividend Planning
Up-to-date financial information from management accounts enables better tax liability management and dividend planning, maximising tax savings.
Attract Funding
Management accounts’ KPIs and insights makes the business more attractive to investors and lenders. Regular reporting, including plans to address issues, increases their likelihood of securing better loan terms and lower-cost facilities.
What Must Be Included in Management Accounts
Management accounts should be tailored to the specific needs and goals of a business. Whilst their content may evolve over time, they commonly include the key financial statements, adding context and presenting data in an insightful, actionable way. Typically, they include the following elements:
Key Performance Indicators (KPIs). These measurable goals, such as sales growth and customer satisfaction, help businesses track performance and make necessary adjustments.
Profit and Loss (P&L) Statement. This outlines revenue, costs, and profits, allowing businesses to assess profitability and compare performance across departments or against forecasts.
Cash Flow Statement. This summarises cash inflows and outflows, helping businesses monitor liquidity and identify patterns for better financial planning.
Balance Sheet. This component provides a snapshot of assets, liabilities, and equity, offering insights into the financial health of the business.
Other Information. Other elements may be included, such as a deeper analysis of specific business areas, non-financial metrics, and external data (e.g., industry averages and market conditions).
Overall, management accounts should be useful and easy to understand, focused and specific, and offer actionable insights without becoming overly labour-intensive.
How to Prepare Management Accounts
Here are quick steps to creating management accounts:
Gather Financial Data. Collect all relevant financial records such as sales, operating and overhead costs, and cash flow. Verify accuracy by cross-checking bank statements and HMRC balances.
Prepare Profit & Loss Report. Calculate revenue and expenses for the period to determine profit or loss. Allocate income and expenses accurately, including adjustments for accruals, prepayments, and tax liabilities, ensuring precise profit margins.
Prepare Balance Sheet. Compile a balance sheet showing assets, liabilities, and equity at a specific point in time. This helps assess financial health and identify potential issues like ineffective credit control.
Prepare Cash Flow Statement. Track cash inflows and outflows to identify potential cash flow issues and opportunities. Use this data for future cash flow forecasting.
Analyse Financial Data. Evaluate financial performance and identify areas for improvement by comparing current figures with previous periods. Include non-financial data for a comprehensive business overview.
Communicate Results. Present management account results to stakeholders, explaining variances in budgets and recommending performance improvements based on the data.
Who Produces Management Accounts
An accountant or a bookkeeper can help produce management accounts by analysing financial statements and identifying crucial data for decision-making. Business owners should also contribute by aligning reports with their goals and sharing key performance indicators with the accountant.
Whilst business owners or key people in the company can produce the management accounts themselves, they may not possess the necessary skills for making one, such as being adept at banking, VAT, and PAYE reconciliations, maintaining accurate ledgers, managing stock, practicing GAAP (generally accepted accounting principles), and handling accruals, prepayments, and depreciation.
Certified management accountants (CMA) possess these skills. Businesses must ensure they hire the right accountant for the job by performing thorough reference checks first. Reliable bookkeepers can provide client references and testimonials to demonstrate their proficiency. This gives business owners the peace of mind that their management accounts are constantly accurate and insightful, as they are handled by professionals.
Frequently Asked Questions
Management accounting is crucial for running any business, regardless of its size or nature. Entrepreneurs and business managers rely on it to craft the best business strategy on resource allocation, business processes, and more.
Management accounting showcases reports for internal decision-making within an organisation, typically used by personnel within the company, and so, are not bound by specific rules or guidelines.
To ensure management accounts are fit for purpose, they must be tailored to the specific needs of the business following certain basic principles such as accuracy, relevance, timeliness, and clarity.
Management accounting primarily focuses on the business’ internal needs and does not consider external factors. It may also lack standardisation, making performance comparisons between organisations challenging due to differing standards compared to financial accounting.
Financial reporting examines past financial performance over specific periods, whilst management reporting forecasts future financial performance and guides operational decisions.
Why Legend Financial for Your Management Accounts
Many businesses skimp on resources for management accounts and rely on statutory accounts instead. The problem with the latter is that they are only produced by the end of the year and may not be any more useful by the time the business needs insights into their financial and operational efficiency, among others.
Aiming to seriously grow your business? Legend Financial’s certified management accountants will be your pathway to success. Our professionals will provide more client-centric advisory into what are management accounts, hands-on support in producing one, and other accounting services as needed. We also offer tax and business development services. Talk to us today!
