Management Accounts

This month I am looking at Management Accounts (or Management Reporting as it’s sometimes called). I am going to look at what management accounts are, why you should do them and when you should do them.

What are Management Accounts?

Management accounts are a set of financial (and non-financial) information to aid the directors and management of a business to run it effectively and efficiently and to assist them in making informed decisions. They are generally for internal purposes only but if a business is looking to raise funds (ie bank loan, investment etc) then these may be requested to support the process.

As a minimum, management accounts should include:

• Profit and loss account for the period

• Balance sheet at the period end date

But the point is there are an internal document to support the decision making process and so they should be tailored to provide the data that will help the business in this, and this will vary from business to business.

Other data that could be included could be:

• Profit and loss comparison to prior years for the same period

• Debtors report – who owes the business money at that reporting date

• Creditors report – who the business owes money to at the reporting date

• Forecast and budget data

• Key performance indicators

• Tax estimates (corporation tax for limited companies, income tax for self employed businesses).

If Key Performance Indicators (KPIs) are included they need to be relevant to the business for example:

• Gross profit margin

• Stock days (how long on average stock is held within the business)

• Debtor days (how long on average it takes customers to pay)

• Creditor days (how long on average it takes you to pay your suppliers)

• Employee retention / employee turnover

• Average order value

• Project status

• Project pipeline

• ROAS (return on ad spend)

Why should you prepare Management Accounts?

Without up to date financial information, making decisions within your business can be hit and miss as although you might think things are going well but:

• You may have forgotten about a large bill you need to pay and so that big bank balance might not be reflective of the cash you have spare.

• That ad campaign may have resulted in lots of website traffic but the average order value has dropped and it’s not actually generated the income you thought it had.

• You might have forgotten to invoice a client at the end of a project and so your income and profit are lower than expected.

• The dividend you want to pay may not be legal as although there is cash in the bank, there are not the reserves available to legally declare it.

• You might only have cash for the next 6 months without bringing in new business.

With management reporting you would be able to keep on top of these issues and really understand how the business is doing. This means you can make proactive decisions rather than reactive ones and forward planning is always so much nicer than panicking down the line!

When to prepare Management Accounts?

First off, there is no set in stone rule for how often you should do management accounts and reporting as the first step is going to be having your bookkeeping up to date, the bank account(s) fully reconciled and accurate figures for stock / goods in transit etc in your accounting records (if relevant) as otherwise what you produce will be meaningless!

So how often should you do them?

• Monthly – Monthly accounts allow you to make informed decisions on a regular basis, you can be truly proactive in your business rather than relying on guesswork and gut feelings. But, running monthly management accounts can be onerous for micro and small businesses so bear this in mind too.

• Quarterly – Quarterly reporting still gives regular insight into how your business is doing but without the time commitment of pulling data each month. This is a good frequency for being able to spot patterns and trends and for supporting you in your decisions.

• Ad-hoc – Some businesses may choose to do limited information on a monthly or quarterly business but do more in depth reporting and information when there are big decisions to be made.

And finally…

All this may sound complicated and scary, speak to your bookkeeper or accountant about how they can help and support you with management reporting and remember, most software will allow you to pull basic reports – we are there to help you and ensure that they are correct and have the information you need.

Rachael