There are three important financial statements in every business: the profit and loss (or income) statement, the cash flow statement, and the balance sheet. Together, these documents provide important numbers and a snapshot of your finances.
But what do these numbers really mean to you? Do they show how your business is growing? Do they show you consistently meet your forecasts? Do they show patterns in spending that can improve your business planning?
To get the most out of these figures, many companies also produce management accounts – an insightful, in-depth analysis of the data. Management accounts aren’t mandatory – and there’s no fixed way to do them. But they’re invaluable tools in going beyond the numbers to understand your current performance and plan for the future.
What are management accounts?
Management accounts are a type of financial report, providing insight on the financial performance of your business. They’re called management accounts because they’re typically used by business owners and management to inform strategic decision making.
For the best results, management accounts are usually produced monthly or quarterly, so that you can more accurately gauge how well you’re doing and make timely course corrections.
Perhaps surprisingly, there’s no standard or ‘correct’ way to do them. Each set of management accounts will be unique to that business. Although there are examples of good practice and popular recommendation of what to include, the final structure of the report will ultimately depend on what information is important to you and your management team.
What are the benefits of keeping management accounts?
Just as management accounts have no fixed format, neither are they mandatory. Still, it’s in your best interests to produce them consistently, because they turn your financial performance data into analysis you can act on.
Here are just some of the benefits of keeping regular management accounts:
- Monitor your growth
You can compare your management accounts monthly, quarterly or yearly to accurately monitor not just your financial growth, but your performance as well. For example, looking at your accounts receivable over time, have you developed your client base from late-payers into on-time payers?
- Plan for the future
Looking for patterns in income and cash flow means you can more accurately forecast your future revenue, or make allowances for doubtful accounts. You might even spot seasonal differences in cash flow, so that you can plan around slower months in future.
- Motivate for funding
A good set of management accounts backs up your business plan, and investors love to see them. You can approach investors confidently, ready to answer all their questions about your business performance – whereas failing to show any will usually result in a swift ‘goodbye’.
- Optimise your processes
When you understand your cash flow, you can make any needed improvements. For example, if clients take a while to pay, you can improve your collection process, or make other credit decisions quickly. If you know which customers pay regularly, you can develop loyalty programmes and attractive offers to reward them.
What’s the difference between management accounts and statutory accounts?
Management accounts and statutory accounts both use data from your income statement, cash flow statement and balance sheet. However, they use this information differently.
A statutory account provides a clean and refined annual snapshot of your financial information. They follow a generic format, so that shareholders and the HMRC can see your overall spending. They’re a tick-the-box, compulsory report produced once a year for all limited companies, focusing purely on the numbers.
A management account is more for you. It’s a detailed, raw, more regular look at your financial information, going beyond the numbers to reveal key insights about your business performance.
What should I include in my management accounts?
As already mentioned, management accounts are by definition bespoke to your business. However, here are a few helpful suggestions of what kinds of information to include. Over time, your choice of what to include may evolve, so that you can formulate the most useful approach for you.
A strong set of management accounts will probably include:
- Key performance indicators (KPIs)
Every business has a set of KPIs – a list of measurable goals you want to achieve within a specific timeframe. KPIs can be financial goals you want to reach each month, like growth in revenue, gross profit margin, operational cash flow, current accounts receivables or inventory turnover. KPIs can also be performance based, such as the number of sales leads you want to achieve.
Write down your KPIs and then examine them against the relevant numbers in your financial statements. Looking at your income statement, are you meeting your revenue goals? Or, looking at accounts receivable on your balance sheet, are enough customers paying within the desired timeframes? See where you’re doing well and look for areas of improvement.
- Profit and loss
At a glance, your income statement shows whether you’re operating at a profit or at a loss. With a management account, you can dig deeper. Compare your income monthly: are you regularly over or under spending? Break your profitability down by department or location: which departments or branches are performing the best? Compare your actuals to your forecasts: are you setting realistic profit targets or do you need to re-evaluate?
- Cash position
Your cash flow is your lifeblood, so having a detailed understanding of it is vital for everyday budgeting, investment and funding decisions. While your cash flow statement summarises the cash entering and leaving your company, your management account looks at this data to identify patterns. How long does it typically take to receive payments from clients? Which areas of the business have the most operating costs?
With an understanding of these patterns, you can better forecast for the future by planning around higher or lower income months, and allocating money optimally across the business.
- Balance sheet
Your balance sheet provides an overview of your net worth, showcasing your assets, liabilities and owner’s equity. While a balance sheet focuses on seeing the numbers balanced, a management account helps you look for deeper insights. Looking at your liabilities over time, how well do you manage debt? How quickly do you turn assets into revenue? How well do you generate returns on investment?
Reading this, it might sound like a management account needs to be exhaustive. But remember, your goal is to produce only the most relevant and valuable information, and keep it focused, specific and to the point. Only include the information vital to your business, which might change as your business does. Going into too much detail or including everything could turn this into a labour-intensive task you’ll be reluctant to do, which defeats the purpose. In short, create something that you’re happy reading, because that’s what you’ll be doing.
How can I use management accounts to access new funding?
For any business in the growth phase, or any business looking to improve its cash flow, your immediate question is: how do I access new funding?
Having consistent, 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 backed by forecasts and accounts can drastically improve your chances of success – especially if your management accounts are done regularly. Some lenders also accept a set of management accounts to give or extend credit terms, which can be a helpful alternative if you’re still improving your credit rating.
If you’re a small, fast-growing business, you might even consider creating a set of management accounts dedicated to pitching for funding. Here, focus your KPIs and insights on demonstrating why you’re good for the investment.
Who should prepare management accounts?
A qualified accountant can help you with your management accounts, since they’re trained to make sense of numbers. They can help you examine your financial statements and pull out data, patterns or red flags useful for decision making. Paying for this service doesn’t have to set you back either – monthly fees can be as low as £60, depending on the level of service you require. Here’s a useful guide for estimating the cost of an accountant.
Ideally, however, you should also play a key role in formulating the management report, since you know your business and its goals best. Share your KPIs with your accountant, so they know what useful figures to analyse and help forecast.