What are management accounts?

Directors check their management accounts

What are management accounts?

If you think management accounts are the same as year-end accounts or something to do with tax returns, think again!

While book-keeping and preparing for tax returns are part of your legal obligations, management accounts help run your business.

Reports at the end of the financial year are legally necessary, but if you’re relying on them to tell you about the health of your business they arrive too late.

And that’s where management accounts come into play. They aren’t required by law and don’t have to be filed with HMRC.

But they will put you in control of your finances to help you support the growth of your business. If you don’t understand them, then use an experienced chartered management accountant to explain what they mean.

Management accounts

These accounts usually include a balance sheet, cash flow statement, profit and loss account and a short report.

You can put all them together using cloud accounting software, such as QuickBooks, and you may want to supply the necessary information to your accountant. He or she is someone experienced in reading them and can often spot issues or trends before there’s a problem.

Why do I need them?

Monitoring your money and measuring your business’s performance throughout the year helps you successfully manage your company. Just glancing at your bank balance won’t tell you all you need to know.

Healthy balances are not always the sign of a healthy business because they illustrate a snapshot in time.

Bank statements don’t tell you what is happening in the future and a healthy balance can quickly be eaten up by costs or a fall in sales.

So, you can’t use them alone to plan for growth. That’s where management accounts are necessary to lift the lid on identifying sales.

Growing your business

When you can identify sales trends you can plan for growth, expansion or diversification. Having a gut-feeling or figures in your head means you cannot plan – and that could cost you your business.

It’s not just in the growth of your business that management accounts can help. There are other benefits, such as:

  • More informed decisions. Identifying trends in ‘real-time’ helps you take action to correct any situation.
  • Measure the performance of individuals. As well as knowing how your business is doing, management accounts highlight the performance of people in your business. They allow you to set key performance indicators (KPIs) for your team to ensure your company is doing the best it can.
  • Control your cash flow. Cash flow is essential to businesses and will highlight problems before they happen. If you can analyse the money being paid out, you may be able to cut your outgoings to head off a future blip. And you’ll also know if you’re getting the best value from your suppliers. It is essential to know how and where your money is being spent.
  • Plan tax and dividend payments. Up-to-date monthly information helps you plan tax and dividends with more confidence. It means that small businesses can maximise the benefits of paying dividends rather than salary.
  • Detect potential fraud. Regularly reviewing the finances of your company means there’s no place for malpractice to hide. For example, fraudulent activity could seriously cost you if it isn’t detected quickly. Leaving your financial report for year-end could mean you don’t spot something amiss that might ruin your company.
  • Reduce costs. At Guidon Group we tell you we’re here to save you money. One way that happens is with the production of regular management account. We can identify costs which have no impact on your business but are included in cash outgoings. How often do you review your bank account to cancel out of date standing orders or direct debits? In the management accounts report these can be included for review.

As well as everything we’ve covered, there is so much more you can learn from management accounts. If you don’t produce annual accounts in your business and want to know what else they can do for you, contact us for a no-obligation meeting.