What are management accounts?

What are management accounts and why are they different to Annual Accounts

Have you ever wondered what Management Accounts are and what’s the difference to Annual Accounts that are produced for Companies House?  What the fuss is all about?  Aren’t they just another set of numbers?   Effectively just your statutory accounts pulled together on another date.  Absolutely not.

I’m Kim Marlor From Krystal-Clear Accounting and I’d like to go into a little more detail on what they are and why they are a must for entrepreneurial business owners wanting to grow!

If you want to be a really successful entrepreneur, then you need to know your numbers and you really ought to have management accounts because it will put you in control so that you know what’s going on

They are NOT a LEGAL REQUIREMENT.  Management accounts are effectively just for internal use, they give real time information on how your business is doing, where you are now and where you are heading!

They are not a replacement for your Annual Accounts, you still need to produce your Statutory accounts once a year if you’re a limited company to be filed at Companies House, but Management Accounts go much further and are produced monthly or at the very least quarterly. 

The format will be bespoke, whatever you need to manage your business, but should at the very least contain a

• Profit & Loss statement,
• Balance Sheet,
• Cashflow,
• Your Actual Numbers achieved usually monthly compared to your Target or often called Budget or Forecast.
• Often a commentary as to why the results are what they are. 
• They will probably show some Key Performance Indicators
• And, maybe even a regular weekly or monthly scorecard as part of the pack!!

 A lot of business owners go into business without any planning and sadly don’t really know with certainty on a monthly basis whether they are profitable or not.  They manage their business by looking at the bank balance but don’t really understand their numbers or the implications of the decisions they make.

Management Accounts really do enable you to know exactly what’s going on, what you’re spending your money on and where the profitability is within the business or not as the case may be.

It’s a bit like driving a car. You wouldn’t go out on a long journey without checking that you know where you are going, Filled up with petrol, checked the oil, water & tyre pressure, put the required destination in the Sat Nav, checking everything before setting off and continually monitoring the Sat Nav throughout your journey to make sure you stay on track even if a road is shut and you need to take a diversion. 

Well, it’s the same with management information. You want to make sure that what you think is happening is actually happening and that you can make the right corrective decisions to get to where you need to be.

Management accounts can show whatever numbers & information you really want to track.  As we’ve said it would usually have a profit and loss, balance sheet and cash flow statement and a commentary depicting what’s really happening.

All the information would be measured against your annual budget or most recent forecast so you can see at a glance what the variances are and what corrective action you need to take.  This could be

• have your underlying costs risen,
• which would then beg the question do you increase prices, get more new customers, sell more to existing customers, or do you find more efficient ways to produce your product or deliver your service.

The important thing is they alert you to what is going on.  Ideally each month so you can take corrective action to get you back on track, before you waste too much time or worse still go out of business, usually by running out of cash. 

Often having your Management Accounts or Management Information as it can sometimes be called, will be useful to highlight where there may be issues in the future if things are not corrected. 

They can be extremely useful in helping to formulate plans where you might need to raise finance.  In any case a lender will probably ask for a set of your latest Management Accounts to assess affordability criteria.  They may look at your last set of Annual Statutory Accounts filed with Companies House, but more often than not require your latest set of Management Accounts as these are up to date and timely!!

As we have said, your Management Accounts are unique to you and will show the key metrics in your business that you need to measure. The key here is that are tailored to meet your needs. We work with our clients to make sure that we understand, and we capture what the key drivers are, and the key performance indicators for their business.

They very often contain non-financial data as well, like for example number of website visitors and you might have return on investments measures. 

You might measure new customers coming from various marketing pillars and the associated expenditure.  So for example, a business owner might want to drill this down to how their Google AdWords campaign is performing, how many click-throughs, how many leads, quotes and ultimately new customers and the financial metrics around this, i.e. what each new customer cost to acquire!

Management Accounts are a great tool for the business owner to discuss with their Accountant and senior management team if they have one.  A Management Information pack will often not only contain financial information and tables but also graphical information to easily see whether the business is on or off track.  Very often this is done using specialist software to pull in information from not only the cloud Accounting systems but other non financial data, so it could be fed in from your google Analytics, your website or just other data you hold on excel  or google sheets.

The important thing is to spend the time understanding and interpreting what the data is telling you and how you can use the data to make the tweaks in your business to correct when you have gone off track.  It should bring the information and the numbers to life and makes it, easier to read and easier to spot trends, an early warning mechanism if you like!!!

So Hopefully you have already worked out that the difference between Management Accounts and Annual Statutory accounts is massive.

• They are produced Monthly or quarterly rather than Annually
• They can show your numbers in pretty much any format you like as they are for your internal use
• They are easy to read and don’t have to have all the “formal” stuff that Annual accounts do
• You can split out any extraordinary or unusual one-off items below the line if it reads better for you
• They have Key Performance Indicators in
• They are not just a balance sheet – it would be a P & L, cashflow forecast and possibly some non-financial numbers
• They can show numbers against budget or forecast and prior year
• They are likely to contain a commentary on what is going on in the business
• They stay internal to the business unless you need to raise finance and the funder or bank ask for them
• Produced very quickly after the bookkeeping for the month has been done so action can be taken, and progress made

What are the benefits from management accounts? Well, as I’ve already alluded to it’s an early warning system to alert you if you are going off track.  That way, you can take action to get back on course.  Clearly a big benefit is to take away the worry and anxiety and enable you to sleep better at night because you’ll know with certainty what the profitability of your business is, whether you are meeting, surpassing or falling behind on your plans and targets and will you run out of cash and need to raise finance?

A big plus is you can make decisions in real time as you know where your business performance is at! Management Accounts give you up to date financial information so you can target certain courses of action.

You’ve also got control because you’re not waiting for the year end (usually several months after if your accountant doesn’t do them quickly) to see what your results are or managing your business by watching the bank balance and just drifting along.

You can spot trends, good or bad, and obviously use that to your greater advantage. So, if you have got an issue with profitability, you can do something about it before it becomes a major issue.

 Also, they will help you to track your progress against your plans and targets. So, you know you’re on the right line and not guessing or worse still keeping your fingers crossed and hoping!!  

After all, what gets measured gets fixed. If you don’t know where you are, how you are going to get to where you want to be, what the gap is or how to fill it!!!

If you’d like to have a chat over a coffee (Virtually or face to face) and to see what is possible, all you need to do is call me or one of my team on 0161 410 0020 or email wecare@krystal-clear.co.uk

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