The Purpose of Management Accounts
Insightful management and financial information is crucial for effective decision-making in business. Gut instinct or intuition alone is never enough – the best business decisions are based on fact. Management accounting plays a vital role in providing directors with a deep understanding of financial performance allowing them to make successful strategic plans. This article explores the benefits of management accounting and why every business should prepare monthly management accounts for review by the directors and senior managers. We will also examine the differences between management accounts and financial accounts, and the significance of including a detailed review of management accounts during board meetings.
What are Management Accounts?
Management Accounts are financial reports prepared for internal use by management within a business. Often referred to as MI (Management Information), management accounts provide business owners and their management team, including CFOs (Chief Financial Officers) and FDs (Finance Directors), with valuable insights into the financial performance, position, and cashflow of the business. Management accounts include a Profit & Loss (P&L) report, Balance Sheet and Cashflow, each presented against a predetermined budget. It is good practice to review both the month in question and the financial year to date position to ensure business performance remains on track throughout the year.
Benefits of Management Accounts
Management accounts bring numerous benefits to a business and are vital for every successful business. Below are some of the main benefits:
- Improved Decision-Making: Management accounts provide up-to-date, accurate and relevant financial information to key decision-makers. By understanding the financial implications of different choices, managers can make informed decisions that align with the company's objectives. This helps in identifying opportunities, mitigating risks, and maximizing profitability.
- Cost Control and Efficiency: Management accounts enable businesses to identify cost drivers and areas of inefficiency. By closely monitoring costs, businesses can implement strategies to reduce expenses, improve operational efficiency, and enhance profitability.
- Performance Evaluation: Management accounts provide a comprehensive picture of the company's financial performance, allowing managers to evaluate the effectiveness of various strategies, projects, or departments. This evaluation helps in identifying areas that require improvement, streamlining operations, and enhancing overall performance.
- Budgeting and Forecasting: Management accounts are instrumental in the budgeting and forecasting process. By analysing historical financial data, businesses can set realistic financial KPIs, allocate resources effectively, and make accurate projections for future growth. This aids in strategic planning and facilitates timely adjustments to achieve desired outcomes.
Key Roles in Management Accounting
For businesses considering implementing management accounts, it is important to understand the key management accounting roles:
- Bookkeeper / Accounts Clerk: Accurate management accounts start with competent and diligent bookkeepers / accounts clerks who enter transactions into the accounting system. It is imperative that they are highly trained and have clear regime of accounting processes to follow.
- Management Accountant: A management accountant is responsible for collecting and analysing financial data, preparing management accounts, and providing insights to support strategic decision-making. They play a critical role in monitoring and controlling costs, identifying trends, and evaluating the financial performance of various business units. An essential part of the role is ensuring that costs are reported in the same month that the sale takes place to prevent inaccurate margin reporting.
- CFO / Finance Director: The CFO / Finance Director relies on management accounts to gain a comprehensive view of the company's financial health. By interpreting and analysing the data, they can develop financial strategies, optimise resource allocation, and ensure the company's financial stability. The CFO / FD will take the lead in interpreting the figures for the other directors as well as using them to inform communications with external stakeholders such as lenders, investors and shareholders.
In smaller businesses it is common for one individual to fulfil two or all of the above roles. However, separation of duties is desirable wherever possible.
Management Accounts vs. Financial Accounts
Business owners and directors often question the difference between financial accounts and management accounts. The differences can by summarised as follows:
- Purpose. The purpose of financial accounts is to comply with statutory financial reporting requirements following generally accepted accounting principles (GAAP) and present the company’s financial position in accordance with a prescribed template. By contrast, management accounts are designed to provide financial insight tailored to the specific business to allow informed decision making. The structure of management accounts is customised to the characteristics of the specific business to support detailed analysis and interpretation. Management accounts present actual performance against budget so action can be taken to address deviation from target.
- Audience. The audience for financial accounts is external including, in the UK Companies House and HMRC, credit providers, customers, suppliers, shareholders and other stakeholders. Management accounts are for an internal audience including business owners, directors and the senior management team.
- Frequency. Financial accounts are prepared annually. In the UK the deadline for submission is nine months after the year end meaning that in a dynamic business environment they are often old news by the time they are published. Management accounts are produced throughout the year at regular intervals, preferably monthly, to allow business owners and directors to analyse performance whilst it is still fresh in their minds, and to take swift action to correct deviation from plan.
Management Accounts and Board Meetings
Management accounts play a crucial role in board meetings, a forum where strategic business decisions are made. By providing up to date financial information, management accounts enable board members to evaluate the company's performance, review KPIs, and identify areas for improvement. The wider pack of information alongside the management accounts should include aged debtors, aged creditors and review of a 13 week operational cashflow forecast. The insights derived from management accounts help in strategic discussions, setting financial goals, and monitoring progress towards achieving them.
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