Updated 20 July 2022
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.
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.
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:
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.
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:
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.
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.
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.