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As part of our Understanding Accountancy Terms articles, we explain frequently asked accounting questions. It includes accountancy terms and jargon to help you run your business.

This time, we’re covering management accounts. These important reports help business owners monitor the financial position of their business.

We’ll be covering exactly what management accounts are, some tips on producing them, the benefits of having them, and what they contain.

What are management accounts?

In a nutshell, management accounts are a collection of financial reports which give a full picture of your business’ finances. The information is used to help managers and owners run the business more effectively, hence the name. They’re similar to annual accounts, but are produced more regularly.

Whilst looking at your monthly profits can give you an idea of how your business is performing financially, in reality your profits are only part of the story.

Management accounts dig deeper into your business’ finances. They show the sort of nitty gritty details that are useful for informed decision-making and spotting areas which might need attention.

The importance of properly managed business finances

It’s not just start-up businesses who struggle with things like cash flow or payment management. Many experienced business owners can struggle, too.

In fact, cash flow management problems are some of the most common reasons for businesses to fail. Closely monitoring your finances helps keep them under control, and reduces the risk of having problems.

Having more information gives you a better chance of spotting problems before they can snowball. Amongst other types of reports, this is where your management accounts come in.

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What’s the difference between management accounts and profit and loss statements?

Profit and loss statements are reports that summarise the sales your business has made (known as revenue) minus its expenses.

Management accounts, on the other hand, are about the bigger picture. As well as a profit and loss statement, they include other reports which, together, give more insight of what’s happening in the business.

What should you include in management accounts?

Management accounts are usually only used internally, to help the people who run the business. This means there aren’t strict rules on what to include, and it’s largely down to what you find useful. Management accounts typically consist of:

Profit and loss statement

A profit and loss statement (or income statement) is a financial report which summarises your revenue, expenses and other costs within a certain time period (e.g. a month, a quarter, or a year).

It can be used to review how efficient your business is, showing the extent of any profits or losses. Having lots of sales (revenue) is encouraging, but if costs are also high, then the business might not actually be sustainable.

This information is key to good decision-making to ensure you’re doing what you can to increase profits and reduce expenses, without affecting the quality of output.

Balance sheet

The balance sheet (a statement of the business’s financial position) reflects the business’ assets, liabilities and any shareholders’ equity during a specific time period. It gives a clear snapshot of what the company owns, and what it owes.

Cash flow information

Another key tool for monitoring the health of a business is its cash flow report. When we talk about cash flow, it means considering how and when funds move in and out of a business.

Managing cash flow is essential for making sure there is money available to pay the bills on time. Profits are essential, but a healthy cash flow will keep your business ticking over and out of trouble.

It’s often useful to look at both the profit and loss statement and your cash flow information together. You may have high sales and low expenses, so your profit and loss statement will look healthy. But, what if also examining your cash flow report shows that you’re struggling to pay your bills on time?

This could help you identify problems with late-paying customers, or lead to shorter payment terms, stricter credit agreements, or using automated invoice chasing to reduce late payments.

Key performance indicators

Some management accounts include a breakdown of key performance indicators. These can be anything, and are used to measure success in a variety of ways.

For instance, customer satisfaction scores, the number of refunds requested, or data about repeat custom can all show how effective the business is at delivering what it sets out to do.

It allows you to direct attention at areas which need improving or changing. This can well tie in with what your financial reports are showing, too. For instance, problems with cash flow could lead back to offering clients discounts and refunds following poor service.

Knowing whether you’re hitting your targets allows you to implement positive changes and see the results of them quickly and clearly.

Who might need management accounts?

Anyone with a business could benefit from management accounts. To make the best decisions in business, you need all the facts and figures available. Decisions which are based on firm data are much less risky.

Do I need to submit my management accounts to HMRC?

The good news is that management accounts aren’t required by law, so you won’t have to submit them to HMRC. In fact, you don’t have to produce management accounts at all.

That said, we always recommend reviewing your financial reports regularly for better control over your business. It’s a great habit to get into.

Who can produce management accounts?

You could ask your accountant, or produce your own management accounts if you feel confident doing so.

If you use accounting or bookkeeping software then it might produce reports for you. Our very own Pandle runs a number of easy-to-understand business reports at the touch of a button.

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How often should you create management accounts?

Management accounts are optional (although highly recommended) so there are no rules on when you should create them.

To ensure your business, shareholders and directors have the best possible information to work from, management accounts should be fairly regular. Aim to gather the above reports and information at least once a month so you can reflect on your progress and make plans.

This helps you avoid the problem of dealing with outdated information, which can have consequences if you’re basing big decisions on it.

The last thing you want to do is base your business decisions on partial or out-of-date information.

Talk to one of the team about The Accountancy Partnership’s online accounting services, by calling 020 3355 4047, or request a call back.

About The Author

Christopher Jones

Forensics graduate-turned copywriter and blogger. I love turning complex topics into easy to understand, yet engaging pieces of content.

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