Understanding management accounts and how they can help you

When you’re running a small business, things move quickly – customers come and go, cash levels fluctuate and prices can change rapidly. That’s why knowing the current financial status of your business is so essential for planning and making the right strategic decisions. However, statutory year-end accounts, which apply to all limited companies, won’t give you the full picture. This is where management accounts come in. 

Management accounts provide a clear view of your performance and financial health on a regular basis. This visibility can help you make more informed decisions about the future of your business, from finding efficiency opportunities to catching cash risks before they become problems.

Let’s explore why they matter, look at the insights they can provide, and show how you can use the information to your advantage.

What are management accounts?

Management accounts are statements that show the financial health and trading position of a company. They are termed ‘management’ because they are prepared for the management team. The accounts are normally produced monthly or quarterly, and tailored to specific needs, but can cover any period that a business wishes to spotlight.

The aim is to provide a detailed analysis of key business metrics to show you how well your company is doing in the focus period, and highlighting trends. Unlike other accounting practices, management accounts are not a legal requirement. Rather, they are valuable performance indicators that help a company take stock of its position, plot the right course, and support growth. 

Without these regular business insights, a company may have blind spots that could lead to mistakes, such as running out of inventory, missing a late-payment or losing margin on a non-profitable product.

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What is included in management accounts?

There is no universal template for management accounts. The contents will vary because the accounts should relate to the specific needs of the business, and every business has different goals and priorities. However, a strong set of management accounts typically draws on the following:

Profit and loss data

A profit and loss (P&L) statement indicates if the business is operating at a profit or a loss. That means showing your revenue minus costs and expenses over a set period, revealing the ‘net’ profit or loss. 

The accounts might include P&L for different parts of the business or different offices, to show the best performers, and you can compare the figures with forecasts or overall industry performance. Having regular P&L data allows you to see where you are overspending, or where you may need to spend more to achieve better results.

Cash position

A healthy cash flow keeps a business afloat – a cash flow statement will show the amount of money that is entering and leaving the business in the period the accounts cover. Knowing your cash position is vital for budgeting and to meet everyday running expenses. 

It will help you identify financial issues, such as customers taking a long time to settle invoices, enabling you to take appropriate steps to avoid running out of money, which may mean accessing business funding.    

Key performance indicators (KPIs)

This is where objectives vary. Every business has its own set of measurable goals relating to specific business objectives. For example, KPIs might include sales targets, number of sales leads, number of customers, gross profit margin, operational cash flow, or customer satisfaction levels. Including KPIs in management accounts will show if you are meeting your goals or need to make improvements.

Balance sheet

A balance sheet will show the overall financial position of your business at a given time. It covers key metrics such as assets and liabilities and reveals the net worth of the business.

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Management accounts vs financial accounts

Management accounts and financial accounts both draw on similar data, such as cash flow and balance sheets, but the objectives are different.

• Financial accounts must be filed every year for tax purposes and for the benefit of shareholders. They focus on numbers only, to provide a clear picture of a company’s financial position, and are a legal requirement that must follow precise accounting standards.

Management accounts are purely for a business’s internal use and are not a legal requirement. The format and content are a matter of choice, dictated by the nature of the business and what the management wishes to focus on to better understand performance and shape business plans. They are produced whenever needed, but usually monthly or quarterly, and provide more in-depth analysis than financial accounts.

Why are management accounts important?

Management accounts are important ‘signposts’ for a business. They enable the management team to track progress over the year and make adjustments if the business is underperforming. You can see which parts of the business need attention and gain valuable strategic information for better decision-making.

For example: are sales volumes too low, is cash flow weak, and are customers satisfied with the service they receive? All this and more can be learned from regular management accounts, which will provide up-to-date financial and performance to keep you in control and identify trends. 

This is especially crucial for cash flow. The earlier you can see a potential shortfall, the sooner you can act to fix it before it is too late. For instance, if you see that you have an supplier invoice or VAT bill coming up, but your accounts receivable won’t be available in time, you could could apply for an iwoca Flexi-Loan to tide you over and bridge gaps, or perhaps fund a business opportunity.

How often should you review your accounts?

The wise approach is to review the business every month and up to every quarter. This will provide an accurate picture of financial health and performance at safe intervals over the year. 

The shorter the time between each review, the easier it is to spot what’s going well or not so well and to plot strategy accordingly. If you leave long gaps, you’re operating blind and trouble can build up unseen.

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How to prepare management accounts

You can either prepare accounts in-house (the DIY approach) using accounting software and other resources, or you can outsource to professionals. Let’s examine the advantages and disadvantages of each approach.

DIY management accounting

With DIY accounting, you don’t need professional accountants or bookkeepers. Instead, you take personal responsibility for recording and making sense of all the company financials. To help you, there are many off-the-shelf tools and templates. Accounting software, spreadsheets, and other accounting packages are widely available and will save you the expense of employing professionals.

DIY accounting means you gain a better understanding of your business because you are directly involved. On the other hand, despite the help of software, accounting is a technically demanding and time-consuming responsibility, and unless you are confident you can do a good job and avoid errors, it is best left to professionals.  

Hiring a professional for management accounts

Hiring professionals will certainly cost you more, but remember there are potential savings if their expertise avoids errors and provides the insights you need to run your business smoothly, identify operational mistakes, and highlight growth opportunities. 

Professional bookkeepers and accountants understand the complexities of compiling detailed financial reports and will ensure accuracy and focus on the areas that matter most to you.

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How to get the most out of management accounts

The value of management accounts is that they provide regular updates on how a business is performing and will be a strategic asset if carefully aligned with business goals. 

Tracking KPIs regularly

For example, you must measure and analyse the right KPIs for your business and market(s), and ensure you are reporting regularly enough to spot (and respond to) developments – especially if the marketplace is volatile or you have an ambitious growth plan or an intensive marketing drive. Monthly accounts should be the minimum in these circumstances, but you could even use shorter periods to gain timely and valuable business data.

Managing your resources

By staying informed, you can analyse the direction of the company, explore different scenarios, and assess the resources you may need to overcome a challenge (such as unexpected expenses) or grasp an opportunity, such as capitalising on a fast-selling product.

This is where management accounts may highlight the need for additional funding – using a short term financing option such as iwoca’s Flexi-loan to close gaps in your cash flow, or invest in areas that can make a difference to your bottom line.

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Can management accounts help me get funding?

Not only can management accounts underline the need for funding, they can also help you get finance. 

Having a transparent and well-documented set of accounts can inspire confidence in lenders. It shows you take your business seriously and are careful about how you set goals and monitor financial performance.

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