Management accounts

What are management accounts

Management accounts are typically prepared monthly, quarterly, or annually, to help business owners and executives gauge the company’s financial health.

The key difference between these and other financial statements is the intended audience: management accounts are for internal consumption only. This means they’re not audited and aren’t part of a legally-mandated reporting pattern. And therefore, they can be whatever you want them to be.

What are statutory accounts?

By contrast, statutory accounts have clearly defined bookkeeping rules and are subject to audit. For public companies in particular, business performance must be properly communicated so that shareholders and governments (HMRC and the IRS) can see that financial management is handled correctly.

Why use management accounts?

The main reasons to use these structure financial reports are similar to the rationale for doing any kind of business analysis. If you want to improve company performance, you need a clear view of its current position.

But for management accounts specifically, these are the clear benefits:

• Better decision making. Businesses always want to be more data-driven, and there isn’t much data more valuable for decision making than financial metrics.

• Structured reporting. Simply by creating a set rhythm and ensuring it's met, you add more structure to your financial reporting. Rather than building reports on an ad hoc basis, everyone knows when data should be available and how they can read it.

• Financial transparency. While your external financial statements also provide this, you can make your management accounts more specific to their stakeholders and easier to understand. You can also exclude aspects that are important to auditors but don’t help your business leaders.

• Spotting blockers. This practice helps you find data blockages both within the finance team and the wider company. And even beyond data, you’ll find clear areas of underperformance and hopefully also the reasons why these exist.

In many small businesses, this level of financial analysis can be overkill. You don’t have the resources, nor the rich financial data, to make this a regular practice. But for most companies - including some small businesses - it’s a healthy routine. Looking back at the financial records at least once per year with a strategic eye can help enormously.

Features of regular management accounts

Because these reports aren’t mandatory, there’s no perfect template to produce your own. What matters to your business will be different from your neighbours.

But because bookkeeping teams already have a set list of required documents, management accounts will naturally build from these. According to The Secret CFO, here’s what you should include:

• Income statement. Also known as the profit & loss statement (P&L), this shows the company’s earnings against its losses in the given period.

• Balance sheet. The balance sheet sets out your assets and liabilities at any point in time.

• Cash flow statement. As the name suggests, this shows the flow of actual cash transactions executed in the period. This is different from the income statement which also considers the value of things like depreciation, debts, and future accounts receivable.

• Revenue & gross profit margin by income stream / business unit. This is clearly a highly strategic metric, as it shows which of your various products or services are the most profitable.

• EBIT by income stream based on marginality.

• Waterfall of revenue and EBIT (budget/last year to actual)

• Cash flow forecast. Whether you choose a rolling forecast or produce one every 12 months depends on the nature of the business and your FP&A strategy. Management accounts should show progress against these forecasts.

• Risks & opportunities. Show the management team the likely impacts of each, and help them create a business plan to match.

• Other KPIs. These will differ depending on your industry, business model, and key priorities. The important point is to ensure that what matters most to your business is highlighted in your reports.

As noted, the exact nature of your accounts will depend on the financial data available and your company’s biggest needs. The key goal is to help your leadership team understand the company’s financial position and make informed decisions for the future.

Keys to effective management accounts

Here are a few principles to ensure your management accounts are impactful and effective.

1. Stick to the important topics

Because these management reports don’t need to follow a prescribed structure, you can include and highlight only the key performance indicators and metrics that really affect your business. Based on your company strategy for the quarter or year, identify the KPIs that determine financial health and success for the business. Then build your management accounts around these.

2. Ensure a fast turnaround

The most common closing cadence is monthly. This rhythm ensures that you always have a pretty detailed view of the company’s financial position, but your finance team (hopefully) doesn’t spend every waking second preparing accounts.

But at this rhythm, you must ensure that the books are closed and reports prepared within the first week - ideally within the first 3-5 days. If not, you have to wait too long to assess financial performance. You’re almost ready to close the books again by the time decision-making can begin.

Slow closing also suggests your processes are far too many and involve too much human manipulation. Which brings us to the next point.

3. Automate where possible

Your highly skilled finance team should focus on analyzing the data, and certainly not on manual data entry or corrections. If it takes more than a few days to prepare the books, it’s likely because accountants have to go back and amend entries, or documents and data are missing.

Step one is to digitize any processes that aren’t already. If you’re scanning documents and copying data across, you’re wasting time.

Second is to ensure that your data systems are properly integrated and that management information flows freely.

4. Month-end quality = year-end quality

Most businesses see their year-end close process as more valuable than the month-end. Which is probably true. But the best way to keep the year-end fast and accurate is to have clean, well-maintained monthly books.

If every year you spend weeks going back through past periods and adjusting or fixing errors, you know you have a problem. The month-end needs to have the same rigor as your annual close. Which should be relatively easy, since you’re dealing with less data.

5. A clear and compelling narrative

The great value in management accounting is the ability to tell a story with financial information. From the CFO or finance team’s perspective, your role is to accurately portray the company’s financial position and show why you’re in this position. From this, the leaders can build a working plan to either keep up the good work or make necessary changes.

Important note: management accounts should be largely backward-looking. They’re based on your past books, after all. So the narrative in this case should show how the company got to where it is today. One smart way to do this is to refer to plans built from previous management meetings. Show how you first identified an issue last quarter, the proposed solutions, and now the progress towards the new goals.