If you run your own business, you may wonder why you need management accounts and what they are.
Their purpose should be to provide you with accurate, up to date financial information reporting on the performance of your business to enable you to make better business decisions.
At Telfords Chartered Accounts we believe that this management information is one of three essential services that all businesses should be provided with to help them run a more profitable, efficient and enjoyable business. The three services we believe all business should have (on top of preparing accounts and tax returns) are:
- A business plan
- A forecast
- Regular business review meetings with their accountant
Aren’t management accounts the same as the annual accounts we sent to Companies House and HMRC?
No, definitely not. The annual accounts or year-end accounts for limited companies that get submitted to Companies House and HMRC are a statutory requirement. If you don’t submit these on time you get fined and ultimately your limited company could be closed down!
Management accounts are prepared for the business owners to use and sometimes also to send to investors, the bank, suppliers and other third parties.
Do we need to prepare management accounts?
Management accounts, which are sometimes also called management reports, month end reports or monthly financials are for the business to use, there is no legal requirement to prepare these.
They do not need to be sent to Companies House or HMRC.
They are intended to help business owners get a better understanding of the financial performance of their business, to help them make better business decisions using this information.
So, what are management accounts?
In very simple terms they are financial reports on your business. Typically, they will include a commentary or business review, a profit and loss account, a balance sheet, a cash report and additional reports on key areas of the business.
The information does not need to presented in a standardised why, but it should contain information which is meaningful and useful to the business owner.
Do management accounts just include financial information?
They can just include financial information but at Telfords we recommend that you include non-financial information to provide more meaning and relevance to you and your team.
You can include reports on other important business measures or key performance indicators (KPI’s) in your business.
Your KPI’s should help you measure and improve business performance and can cover the following areas:
- Sales and marketing
What KPI’s should I measure in my business?
You should measure the KPI’s that are important to you and can help you improve business performance.
If you’re not sure of what KPI’s you should use in your business, we can help you identify and measure what is important.
How should I use management accounts information to improve my business?
Your business management information should provide you with relevant and meaningful information which will enable you to measure and improve business performance.
If we look at financial performance for example, the following are examples of KPI’s you could measure:
- monthly sales
- gross profit margin
- net profit margin
- staff costs as a % of sales
How often should I prepare management accounts?
This really depends on you and your business. We recommend that they should be prepared at least quarterly. Some businesses prefer monthly.
The key is to use the information to enable you to make better business decisions, such as:
- do we need to improve our gross profit margin?
- when can we afford to take on a new employee?
- when is our cash position strong enough to purchase new vehicles?
- which areas of our business generate the best return and should we concentrate on?
- do we need to increase our sales and marketing spend?
- do we need to get additional funding in place to finance business expansion?
What is the best way to start preparing and using management accounts?
We recommend speaking to your accountant to work out what is best for you and your business. At Telfords Accountants we stay in regular contact with our client to ensure we are providing them with the right level of support.
If you would like to find out more about how we could help you and your business, please get in touch.