Many businesses produce management accounts on a monthly or quarterly basis for the benefit of their owners or directors. Unlike annual accounts, they are optional and do not have to be filed with HMRC or Companies House. Nevertheless, there is significant value in preparing management accounts for your small business, whether you operate as a sole trader or through a limited company or partnership.
This post provides an overview of the key benefits of producing management accounts, the information that is generally included, and what this data will tell you about your business.
What are management accounts?
Management accounts are informal financial reports that provide valuable insight into how a business is performing. Tailored to the requirements of the individual organisation, they are usually produced on a regular and consistent basis at the end of every month or quarter.
As the name suggests, they are typically used by managers and business owners, helping them to keep track of spending and profit, monitor growth, and make informed decisions based on current financial data.
However, despite their inherent value, very few SMEs actually prepare management accounts. As a result, many businesses are at greater risk of underperformance, slow growth, overtrading, or unexpected cash flow problems.
If you don’t have accurate, up-to-date financial information, you’re essentially flying blind. This is far from ideal, and will significantly hamper your ability to sustain and grow your business.
Key benefits of management accounts
Regardless of how big or small your business is, producing management accounts will be of great benefit, enabling you to:
- analyse and compare performance over time
- monitor the growth of your business
- identify areas or processes in need of improvement
- cut unnecessary costs
- manage your budget more effectively and efficiently
- increase profitability
- avoid cash flow problems
- provide early warning signs of potential threats or negative trends
- make strategic decisions
- accurately forecast future revenue and make informed plans
- support business funding applications and attract new investors
These insights will help you to understand what you are doing well and which aspects of the business are problematic. If you can measure your company’s performance and profitability, you’ll be better placed to make evidence-based improvements going forward.
What to include in management accounts
Since management accounts are optional, there is no standard format and you do not have to follow UK accounting standards when preparing them for your business.
However, effective management accounts should typically include the following information:
1. Executive summary
An executive summary should be presented on the first page of the management accounts, providing an overview of important monthly or quarterly highlights from across the business. This will help you to recognise the areas that are performing well and those requiring attention.
2. Key performance indicators (KPIs)
Key performance indicators, or KPIs, are quantifiable measurements that businesses use to gauge their performance over time, track their progress toward strategic goals, and identify areas for improvement. They are the performance areas of most interest that are essential to the success of the business.
KPIs differ depending on the industry, purpose, and objectives of the business, but some common examples include the number of sales per month, total sales revenue in a defined period, client acquisition or conversion rates, cost reduction, or even website bounce rate.
3. Balance sheet
The balance sheet provides a snapshot of your company’s financial position at a specific point in time, broken down into current assets, liabilities, and equity. It shows you what the business owns versus what it owes.
4. Cash flow statement
Having a healthy cash flow is vital to the survival of your business, so it is important to understand and monitor your cash position to avoid running out of money.
Your cash flow statement will tell you when payments are coming into the business, as well as how and where you are spending money. This information will make it easier for you to identify patterns and manage your business cash more efficiently.
5. Profit & loss statement
The profit and loss statement provides a summary of income versus costs and expenses, helping you to calculate your profit or losses over a specified period of time.
Alongside the other financial documents in your management accounts, you will use the profit and loss statement to monitor and improve the health of your business.
Difference between management accounts and annual accounts
Management accounts and statutory annual accounts both rely on financial information from the balance sheet, cash flow statement, and profit and loss statement, but the information is used differently.
Management accounts are for certain people in the business for the purpose of providing key performance and financial health insights at regular intervals. They are optional, for internal use only, and do not have to be prepared in accordance with any rules or in a particular format.
Statutory annual accounts are a legal requirement for companies. Providing an overview of a company’s financial activity and performance throughout its most recent financial year, they must be filed with HMRC and Companies House each year. Annual accounts must be prepared in accordance with strict accounting standards and they are disclosed on public record.
Should I appoint an accountant to prepare management accounts?
This depends on whether you have a finance department or someone in your business who has experience in preparing accounts. If you do, you may not need an accountant.
However, if you are running the business by yourself, we would recommend appointing an accountant to help with such affairs. Preparing accounts of any kind can be incredibly difficult if you do not have an accounting background.
Thanks for reading
We hope this post has helped you to understand the value of preparing management accounts for your limited company or small business. Once you start using them on a regular and consistent basis, you will be able to see where you are making money and where you are overspending or underperforming.
Please leave a comment below if you have any questions, or get in touch if you would like to speak to us about our company formation services.