WHAT ARE MANAGEMENT ACCOUNTS AND WHY DO I NEED THEM?
Management Accounts are “a set of tailor-made and standard financial reports” that help business management make key decisions and provide a clear insight into the business situation.
Unlike Statutory Accounts that are mandatory requirements set by HMRC and Government and are prepared after the year end, Management Accounts are focused on your business requirements. So, the business can decide the level of detail, the frequency, the layout and the accounting period you wish to analyse.
Management accounts can play a vital role in growth planning, for instance if you needed a loan, such reports would help provide Banks with insights on how your monthly financial situation has been. It, therefore, acts as a token of guarantee and assurance that you hold a strong financial standing, resulting in winning you the loan.
Moreover, you can have a better understanding of whether your strategies and plans were according to the budget or not. Additionally, you can share the numbers with your team in order to boost their confidence in your plans as well. Having a monthly overview of the numbers with everyone onboard can help a lot in moving forward or cutting down on your plans.
Last but not least, you won’t find yourself lost in the confusion of finding where things went south. Reviewing these reports monthly will help you stay on top of your financials. As a result, by the end of the year, it won’t be difficult for you to figure out what things went wrong and what worked out.
As you can see this can be a powerful tool for any business when done correctly and can really make the difference in growing your business through identifying, opportunities, trends, weaknesses and risks associated with difference operations of the business.
WHAT GOES IN MANAGEMENT REPORTING PACKS
In simple, the idea is to include all that is relevant information required by management and decision makers to make an informed decision. Although some large organisations can have huge sets of reports, most management reporting packs will include the following;
1. PROFIT & LOSS (P&L) ACCOUNT
Profit & Loss (P&L) shows the performance of a business in a given period of time. It would typically show summary of Income received and types of expenses incurred.
However, every business is unique, a retail business for example with multiple stores may want to see Income & Expenses split by each store, whereas a construction business may want to see profitability of each project it undertakes.
P&L produced for management should therefore be tailor made keeping in mind the nature of business, the level of granularity required, the frequency and the layout.
2. BALANCE SHEET
A Balance Sheet shows the financial position of a business at any given point in time. A Balance Sheet should be prepared with notes to help indicate key business ratios, such a liquidity ratios, debtor days, inventory days, etc to highlight areas of risk and better plan for cashflow.
3. KEY PERFORMANCE INDICATORS
Depending on your industry, nature of business, the management should work with the accountant key performance indicators for the business. These should then be benchmarked against the industry norm and regularly reviewed to see the health of the business.
4. AGED DEBTORS & CREDITORS REPORT
Aged Debtors reports are a summary of all the business debtors (people who owe you money). It shows how much is owed and for how long the money has been owed. These reports are probably one of the most important everyday reports to help businesses with its cashflow and to reduce its bad debt risks.
Aged Creditors reports are similar to Aged Debtors, but instead the report shows a summary of all the business creditors (people that the business owes money to). When effectively managed, this report helps businesses determine how much and when to pay its suppliers.