12 Nov
Management Accounts: How to Prepare Management Accounts?
Prepare effective Management Accounts
What are Management Accounts
Also known as managerial accounting or cost accounting, management accounts are financial reports produced for managers and business owners. It is usually produced on a monthly and quarterly basis including a profit & loss report and a balance sheet. Management accounts (less formal) are quite similar to year-end accounts (formal) but can be personalised as per the user’s requirement. However, management accountants are not dictated by generally accepted accounting principles, unlike financial accounting.
With the purpose of investigating the financial standing of a business in the market, management accounting is the process consisting 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.
The process of preparing Management Accountants can be outsourced to an expert Accountant or an Accountants in London, however, keep reading the article for more information on how to do this if this is something you want to do yourself.
They 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 business decisions, which ultimately leads to growth.
These accounts typically revolve around a firm’s profit & loss accounts. They are comprised of numerous reports that usually prove to be very useful in accurate and reliable financial and demand forecasting. These 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 account 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 these 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 statement, and balance sheets.
It is equally important to use these 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:
- Key performance indicators
- Executive summary
- Balance sheet
- Cash flow statement
- Profit & loss statement
Let us begin with KPIs
Key performance indicators (KPIs)
KPIs are industry and business-specific, so it’s important to choose your Key Performance Indicators 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 net 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 statements that have the 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 balance 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.‘
Profit and loss:
Profit & 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 & 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 Accounting differs from statutory accounting 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 for better decision making.
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 for those individuals who are from a non-accounting background.
It’s always advisable to speak to an accountant in London, 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.
Clear House Accountants are specialist managerial accountants in London who have years of experience working with businesses that have grown at an extreme pace. Having worked with such businesses our management team have realised that accountants who scale with your business can add immense value to the growth process and the stability required when growth can be volatile and extreme. If you want to set up an effective management accounting process for your business why not book a non-obligatory telephone call with us, we can also provide some free templates which can help you get started.
Author Bio
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.