Business December 10, 2019 Last updated December 9th, 2019 95 Reads share

How to Prepare Management Accounts?

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Learn how to prepare effective management accounts for your growing business

Overview

With the purpose of investigating the financial standing of a business in the market, management accounts consist of a set of financial reports that businesses use to examine the financial health of the company while using it to plan efficiently and effectively for the future of the business.

Management accounts serve as one of the key factors in discussing business agendas, plans and targets in large organizations. However, small businesses can also utilize these accounts to manage their finances and operations effectively and to use these to engage in informed decisions, which ultimately leads to growth.

Management accounts typically revolve around a firm’s profit and loss accounts. They are comprised of numerous reports that usually prove to be very useful in accurate and reliable financial and demand forecasting. Management accounts are typically prepared on a monthly or quarterly basis.

If you want to prepare a set of management accounts but are unsure as to where to start you should hire a management accountant or speak to your current accountants to see if they can help.

What should management accounts include?

You are not bound to follow a set procedure of rules or processes whilst preparing management accounts, there is nothing mandatory to include, rather your management accounts are a compilation of all financial or operational information which you believe to be of importance, collected from various financial reports that management has gathered. Typical management accounts, as said earlier, revolve around profit and loss accounts, cash flow forecasts, income and balance sheets.

It is equally important to use management accounts to track your business’s KPIs which are vital for your business’s financial health. This article tends to discuss the way through which you can prepare effective management accounts. Another option would be to hire a competent management accountant or speak to your accountants if they can provide management accounting services.

Here are some of the key components of a management account we will be discussing:

  1. Key performance indicators
  2. Executive summary
  3. Balance sheet
  4. Cash flow statement
  5. Profit and loss statement

Let us begin with key performance indicators (KPIs)

Key performance indicators (KPIs)

KPIs are industry and business-specific, so it’s important to choose your KPIs wisely. With the assistance of financial forecasting and demand forecasting, these metrics should be given significant importance whilst inspecting your business’s management accounts, as these indicators have the capacity to reveal whether you are in line with your business’s long term goals or not.

Executive summary

The executive summary is comprised of important monthly highlights. This may include your business’s gross profit margins, turnover ratio, losses incurred, etc. Every department of your business should have separate highlights so that it becomes easy to discover which areas of your business are doing the best and which areas are only adding up to total losses. Keep in mind that you should present the executive summary on the first page of your management accounts

Balance sheet

The balance sheet is hands down one of the most important financial statement that has an ability to accurately depict the financial standing of a firm. A balance sheet typically lists down assets, liabilities and the owner’s equity at a certain point in time.

Cash flow:

Cash flow serves as a vital factor in maintaining the financial health of a business. Cash flow statements are usually tracked and amended on a monthly basis. A cash flow statement, when combined with cash flow forecasting, provides businesses with an idea of how much cash they will be having in the future and how much will they lose over time. This information can help business owners get firm control over their cash flow and can enable them to manage their business finances effectively.‘

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Profit and loss:

Profit and loss management is managing what flows in (income) and what flows out of your business (expenses) in such a way that the business is able to enjoy net profits. A profit and loss statement is a critical indicator used to predict the actual business performance against the monthly, quarterly or annual forecasts.

Designing, preparing, managing and tracking management accounts can get complicated, working with an accounting firm or accountants in London who can help you with your management accounts process can be the key factor when selecting an accountant to work with.

How do management accounts differ from statutory accounts?

Management accounts differ from statutory accounts in a number of ways. For instance, unlike management accounts, statutory accounts do not give much importance to the financial details and are utilized for the purpose of satisfying third parties rather than internal management (potential investors, HMRC, Companies House, etc.). Management accounts, on the other hand, take the minutest financial details under its radar and are used to provide you with a granular picture of your business performance over the months.

Statutory accounts are to be provided to HMRC at the end of every tax year but management accounts are not required to be provided by the business.

The main reason we lay emphasis on using management accounts is that because they have a bespoke design as per business needs and are always up to date. As management accounts are prepared on a monthly or quarterly basis, they have the potential to reflect the true state of your business. On the other hand, statutory accounts are comprised of outdated data as it is usually prepared on an annual basis, therefore, it is not the best basis for a business owner to rely simply on their statutory accounts to make effective decisions.

How can accountants help you prepare management accounts?

No matter how much financial documents and data you have stored over the years, preparing management accounts for your business can become very tricky and challenging for entrepreneurs, especially those individuals who are from a non-accounting background.

It’s always advisable to speak to a nearby accounting firm, business accountants or management accounts, as they can provide you with relevant expertise and knowledge on how you can prepare effective management accounts, which can help business owners save more money and time.

Thao Le

Thao Le

Thao Le is a Senior Accounting Manager at Clear House Accountants. Having worked and grown in the industry for a number of years she is now responsible for a team of accountants, tax planners and bookkeepers, working with them to help clients from a variety of industries, grow, save money and plan for the future. Thao holds a Bachelor and Masters degree in Accounting and Finance and is currently working towards her ACCA, she is also a Xero and Quickbooks Certified Advisor. Thao believes her expertise lies in high-level tax planning, management accounting and strategic business planning based on financial performance and business analytics. Her experience, expertise and knowledge make her an exceptional contributor at clear house towards various articles and research content.

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