Management Of Account: What Are Management Accounts 

Financial reporting is a must for most business owners and managers to know where their financial health is at. Compiled from management accounts the reports give detailed, measurable information about a company’s current financial performance, usually monthly or quarterly. But how do you get insights from these reports?

In this article, Real Business will break down the components of management accounts and how to use them to improve your company’s performance and make decisions that will grow your business organically. Read on to find out more.

What Are Management Accounts?

Management accounts are internal financial reports that are made up of:

• Profit Loss Report – The profit loss report shows revenue, expenses and profit over a period. This gives insight into the profitability and operational efficiency of the company’s activities.
• Balance sheet – The balance sheet gives a snapshot of the business’s financial position. It shows assets, liabilities and shareholder equity.
• Cash flow statement – This tracks the movement of cash in and out of the business.
• Key performance indicators (KPIs) – The key performance indicators are financial and operational metrics and how they are tailored to business goals – such as gross profit margin, return on investment and sales growth.
• Variance analysis – The comparison of financial results against budgeted or forecasted figures identifies variances in performance and what caused them. This can be good and bad, so you can identify opportunities or learn lessons.
• Budget forecasting – This gives a projection of future revenue, expenses and profits – so you can prepare and plan resource allocation. These are usually based on current and historical data.
• Departmental or segmental reports – Breaking down financial performance by department, product line or geographically can help you focus on certain areas of the business.
• Working capital analysis – This assesses the current assets and liabilities within the organisation. Using this you can determine how efficient the business is at managing its short-term financial obligations.
• Break-even analysis – When you produce management accounts you can calculate the point at which total revenues equal total costs. This allows you to assess the minimum requirements for the business to make a profit.
• Financial ratios – This provides an analysis of key ratios such as liquidity, solvency and profitability ratios. This gives an overall view of the company’s financial health and operational efficiency.
• Trend analysis – This allows you to review financial data over time to identify patterns and trends for future decision-making.

Why produce management accounts:

• To inform decisions – Management accounts are financial reports of data and are used to make data-driven, measurable decisions on investment, cost cutting, gross margin percentage and growth strategies that impact the bottom line.
• To monitor performance – Regular use of detailed management accounts allows you to set and monitor KPIs so you can take action quickly in underperforming areas.
• To identify trends – Analysis of revenue, direct costs and profit over time helps you forecast future business performance.
• To plan finances – Up-to-date financial data allows you to tweak your financial forecasts so your budgets are realistic and aligned to actual performance.

Examples Of Management Accounts

For examples of how the best management accounts are produced, take a look at the following:

Table 1: Profit and Loss Statement (P&L)

Table 2: Balance Sheet

Tips For Producing Management Accounts

It’s important to produce management accounts that are tailored to the business’s needs. Here are the elements to produce management accounts:

1. Regularly Review and Update Your Accounting System: Keep your accounting system up to date. An accurate and reliable system means the management accounts reflect the current financial position of your business so you can make timely and informed business decisions.
2. Use a Consistent Format: Consistency is key with management accounts. A consistent format makes it easier to compare financial performance over different periods so you can identify trends and make better strategic decisions.
3. Include Key Performance Indicators (KPIs): KPIs are essential to measure your business against its goals. Including relevant KPIs in your management accounts gives you a full view of your financial performance so you can track progress and increase profit with management accounts.
4. Provide Detailed Analysis: Detailed analysis of financial data reveals insights that can drive business improvements. By breaking down the numbers and understanding the underlying factors you can make more informed decisions to improve your business.
5. Use Visual Aids: Visual aids such as charts, graphs and tables make complex financial data easier to understand. They provide a clear and concise way to present information so managers and stakeholders can get it.
6. Ensure Accuracy and Completeness: Accuracy and completeness are vital to producing reliable management accounts. Check your data and ensure all financial transactions are recorded correctly to avoid costly mistakes and make good business decisions.
7. Seek Professional Advice: If you’re unsure about any part of producing management accounts seek advice from a qualified accountant. They can help you navigate complex financial data and ensure your management accounts are accurate and insightful.

Common Management Accounting Challenges

Producing management accounts can be a complex task, especially for small businesses or those with limited accounting experience. Here are some common challenges and how to overcome them:

1. Lack of Accounting Skills: Management accounting requires a certain level of skill. Without the necessary skills or experience, it can be difficult to produce accurate and reliable management accounts. Consider training for your team or hiring a qualified accountant to get your accounts up to standard.
2. Limited Resources: Producing management accounts can be time-consuming and costly. For businesses with limited resources, it can be hard to allocate time and money. Prioritise the most important parts of management accounting and use accounting software to streamline the process.
3. Complexity of Financial Data: Financial data can be complex and hard to understand. If you don’t have the skills to interpret the data it can be difficult to produce management accounts that give you a clear view of your business’s financial performance. Use accounting tools and seek professional advice to simplify and understand your financial data.
4. Identifying KPIs: Identifying the right KPIs is key to management accounting but can be tricky, especially for those new to the field. Start by focusing on the most important parts of your business and gradually add more KPIs as you gain more experience and understanding.
5. Ensuring Accuracy and Completeness: Ensuring your management accounts are accurate and complete is critical but can be difficult without proper systems in place. Put in place robust accounting processes and regularly review your accounts to catch and correct any errors.

By overcoming these common challenges you will improve your management accounts and get a better view of your business’s financial performance.

Conclusion

Management accounts are key for businesses’ understanding of their financial performance. High-quality management accounts require best practices including regular review and update of your accounting system, consistent format, KPIs, detailed analysis, visual aids, accuracy and completeness and professional advice.

Common management accounting challenges are lack of accounting skills, limited resources, complexity of financial data, and difficulty in identifying KPIs and ensuring accuracy and completeness. By overcoming these challenges and producing high-quality management accounts businesses can make decisions, improve their financial performance and achieve their goals and objectives.

FAQ: What is integrated reporting?

Integrated reporting should be compliant with generally accepted accounting principles (GAAP).

Examples of non-financial metrics are:

• Sustainability KPIs
• Customer satisfaction
• Process quality
• Risk management factors
• Innovation indicators

FAQ: What are the key features of a good management account?

• Bookcheck help with management accounts – A qualified and experienced bookkeeper must be hired to ensure tasks such as bank reconciliation are done properly to ensure accurate reports.
• Data collection – Data must be collected from all departments to ensure sales, expenses and cash flow to ensure no critical data is missed.
• Reconciliation – All data must be crosschecked with bank statements, invoices and other financial records.
• Categorisation – Management account data must be categorised for ease of use.
• Report production – Accounts are populated with validated data, producing clear, concise and scheduled reports that meet business needs.
• Diagnostic analysis – Accountants should analyse data to identify any variances of expected performance, and identify areas of concern or opportunity.
• Root cause analysis – These reports should be used to drill down into the underlying causes of financial trends and variances, such as market dynamics, operational efficiency and commercial management to get deeper insights.
• Insight reporting – Accountants must deliver clear and actionable insights to leadership to get the most out of financial reporting.

FAQ: Who Prepares, Reads and Uses Management Accounts?

• Preparation – In-house or outsourced to accountants.
• Reading – Management accounts are for the managers within the organisation.
• Use – Management accounts are used by managers to check data against budgets, analyse profit drivers, control costs, drive efficiency, identify investment opportunities and keep stakeholders informed.