7 signs you need management accounts

by | Mar 2, 2021 | Business

If you’re reading this as a business owner of, say, a Limited Company (but a sole trader equally works here), you may just receive your accounts once a year. It contains a P&L and a Balance Sheet, plus a few notes and usually lands in your inbox a few months after the year-end. To add to that, you might have access to cloud software and see ‘live’ what is happening.

At what point is that not enough?

Now, I want you to imagine you are the boss in charge of a huge business, with millions of pounds of turnover and hundreds of staff. And that’s all you have. A set of accounts issued a few months after the year gone by.

See the problem? How can you make decisions? Do you understand what has happened in the business? Do you have comfort you’re trading well, or be able to spot potential issues up the road? What stores are profitable? What products sell best? What’s the cash flow? It’s simple. You can’t really answer any of these questions.

These behemoths make sure they don’t have these problems, by complimenting their finance functions with financial planning analysts and management accountants. The job titles are interchangeable, but their purpose is broadly the same. They are pulling together topical, key information frequently and regularly so management can make informed decisions. But what about the smaller businesses?

It begs the question. Where do you draw the line? At what point is the annual set of accounts simply not giving you what you need?

If your business has grown and you intend to grow it further, it may be management accounts could benefit you. By adding some extra reporting and analysis to your business, you’ll become more aware than ever before.

What are management accounts?

Management accounts present a tailored view of your business going into greater depth than you would ever see on a set of normal, or ‘statutory’ accounts. They can still cover the same core financial statements (that being an income statement and a balance sheet) but may expand further. For example, looking at income by location, or expanding on your trade debtors by their age. It could be there is accompanying commentary, or charts and graphics to visually illustrate successes or concerns. Or pre-defined key progress indicators (KPIs) or targets (such as a budget) can be measured against how well you have done.

Unlike statutory accounts, these can take any form you like. They are bespoke and designed around you and what you need to run your business. If crafted with your accountant, they become a powerful, relevant tool for plotting your future success.

They can also be pulled together as frequently as you like, either annually, accompanying your statutory accounts or more commonly (and with greater impact), as a quarterly or monthly output.

Discipline is required though – you need up-to-date bookkeeping prepared to ensure they are valuable. Management accounts with a bank account three months out-of-date will be as effective as a chocolate teapot. That is why in larger organisations, a process called a “month-end” takes place, where the objective is to ensure the accounts reflect reality as best as possible. There’s nothing stopping any business of any size completing a month-end, by the way.

Management accounts aren’t for everyone though. How do you know if management accounts are a necessity? Here are seven signs you could be missing out by not having management accounts for your business.

You are thinking of, or already have started expanding

If you are selling one product or service from one location, you can easily enough see if what you are doing is successful or not.

But when you add a second or third location, or add a different product to your offering, the figures are not so clear. Without digging into the data, you cannot really tell if the new product, or new location is making, or costing you money. Management accounts can provide a process for tagging data, such as sales and costs by location, so you can tell quickly if your new idea is driving a huge profit or causing a loss. You can isolate the successes from the failures.

You want to manage your expenditure

If you are going to succeed with your business, having a firm grip on your expenses will always be key. But the bigger the operation, the harder it becomes to keep track and control your spend.

High quality management accounts can allow you to dig into the underlying costs. It will tell you how and where your cash is going and spot things such as exceptions, top tens or spend by type. Combine this with a budget and you can really get a grip on the expense base.

You want to get a firm grip on your cashflow

Getting clarity up front on what your cash flow is looking like give you insights into potential future problems. Reports showing where and how you’re spending your money will help you think ahead.

Cash flow forecasting takes this a little further, but good management accounts with a magnifying glass on your bank account will give you exact certainty on how your cash is moving.

You are contemplating raising finance

If you are looking to raise finance, any astute lender or investor will want to understand what makes your business tick. Banks will want to assess your affordability, whilst investors will want to have certainty on their return.

Management accounts get under the hood of your business and can give those key stakeholders the assurances they need in supporting you.

You cannot explain how your business has performed

Sometimes, things just don’t quite make sense. You’re working all the hours under the sun, you’ve had jobs every day for months, but you’re making a loss?

This is usually a clue you need a deeper analysis at what has gone on in your business. It could be your pricing is not up to scratch, or it could be an unforeseen overhead. Management accounts can provide a platform to seeing what has happened and why and allow you to keep doing what is working or take corrective action on the things that don’t.

You want to plan ahead with your taxes

Planning your taxes after the year-end is closing the door after the horse has bolted. Your options become limited and the tax due in most cases is a fact at this point.

Management accounts can start to give business owners a view before the year-end on where they will end up. For example, a set of management accounts 3 months before the year-end could identify sizeable profits and spark a useful conversation with your accountant on what the corporation tax bill will likely be. And more importantly, what can be done to legitimately get that tax bill down.

You need to measure performance more regularly

Maybe you need to calculate what to pay on commissions to staff or keep tabs on slow paying debtors. There are some things you really need to keep a close eye on, which if left unchecked, could cause your business harm.

Management accounts can pull all this information together in a consistent and regular format, so you are kept up to date.


Are management accounts for me?

Arguably, management accounts and analysis like this can benefit near enough all businesses. It takes your financial understanding to a new level. It becomes more and more essential the larger you grow, however you should also weigh up the value and effort of these accounts alongside the complexity of your business and the above signs.

Reporting within systems like QuickBooks and Xero does provide some snippets, but these are very much “out of the box” and will lack the detail you need. Equally the bookkeeping becomes an essential part of this, by ensuring transactions are correctly labelled so they are presentable.

Think management accounts could benefit your business? Get in touch today to understand how our industry expertise in this area could benefit your business.

Ready to start the journey?

To get help with your accounts and start freeing up your time to focus on growth, talk to the Mayflower team today.

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