Implementing Management Accounts
Management Accounts - am I using them correctly?
Management accounts are a vital part of running your business effectively.
Get access to the right financial direction for your growing business.
Review your management accounts regularly
In order to make better use of relevant financial data, management accounts should be reviewed on a monthly basis.
The value of management accounts lies not only in reviewing historical results or your current financial position but they are also key in helping you make decisions going forward. Management accounts can be seen as the temperature gauge for your business – you can only adjust the thermostat if you know what the current temperature is. In short, not using your management accounts as a decision-making tool on an ongoing basis is similar to fighting with one hand tied behind your back. While blindfolded.
Assess debtors and creditors
Debtors and creditors should be proactively managed to avoid cash flow shortages. Assessing debtors’ and creditors’ balances should be part of your management accounts process.
Understanding not only your cash balance at month-end, but your balance throughout the month, will give you an indication of whether you need to apply for an overdraft or not. Some businesses are overly quick to apply for an overdraft. Assessing and adjusting your payment terms for debtors and creditors can reduce your working capital cycle and result in you not requiring an overdraft. This can only be done by assessing your debtors’ and creditors’ balances on a monthly basis, at least, as part of your monthly management accounts. Managing your debtors and creditors correctly can go a long way toward having a healthy balance sheet.
Compare actual vs projected accounts
Your actual results for the previous month and the year-to-date should be compared to your budget to help determine whether or not your business is meeting its targets.
Where the business is not meeting targets, there is an opportunity to investigate and determine whether changes can be made to that specific part of the business. In order to identify what next steps need to be taken, it is important to first understand the current situation.
In the same way, results for the previous month and the year-to-date can also be compared to the previous year’s results to determine whether the business is growing or not. Are you aware of which of your revenue items contribute the most to your total revenue? This should form part of your management accounting process. You should also understand which are your largest expenses on a monthly basis as well as any changes to those expenses, as those are the ones that have the biggest impact on your bottom line.
Using a “big picture” mentality
Remember to always work on your business, not just in your business. Knowledge of key trends and variables is needed in order to make the most effective managerial decisions.
The devil is in the detail but this is also where one can get lost. Avoid getting caught in the weeds and understand how your business is performing on a higher level before diving into the specifics. Understanding the high-level variances will guide you and determine where you need to spend the most time in analyzing your management accounts. This will save you time and money in the long run.
Understanding key revenue drivers and cost drivers for each month will also assist in making crucial decisions. e.g. selling price of service A for the month or volume of product B for the month.
Management accounts should be designed to assess key performance indicators that have been set by the business. For example, revenue growth, gross profit margins and profits.
Management accounts also serve as the base for:
Management account services provided by OCFO
The management accounts prepared by the OCFO team are designed for high-level financial decision-making purposes.
Management reports are drawn up for both the director who wants to have a high-level understanding of the position and performance of the business, as well as the hands-on business owner or CFO that wants to get to grips with the nitty-gritty and specifics of the monthly accounts.
If you are managing a group of companies, OCFO can combine these businesses into one consolidated report to allow you to have an overview of the performance of the group as a whole.
If you need assistance with your management accounts and related decision-making, contact OCFO and learn about our remote accounting services and available packages. Our team can assist with your financial planning and management, and make sure that your business is set up for profitability and success. Contact us today.
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Frequently Asked Questions
What are management accounts?
Management accounts are, at a minimum, an income statement and balance sheet that indicates the financial performance and position of a business. Management accounts can also include cash flow statements, debtor’s age analysis (accounts receivable), creditor’s age analysis (accounts payable), inventory analysis, etc. These are normally prepared on a monthly or quarterly basis. Management accounts are normally prepared for business owners, directors or managers.
Why are management accounts important?
Business owners, directors or managers need management accounts to understand the financial position and performance of the business, in order to make informed decisions for the business to grow and succeed.
What is the difference between management accounts and financial statements?
Management accounts are internally focused whilst financial statements are more externally focused. Management accounts are prepared on a monthly or quarterly basis and are used by management, directors and entrepreneurs to make informed decisions about the business going forward.
Financial statements are usually prepared on an annual basis and are required by law.
Financial statements are:
- Required by law (e.g. tax law and company law)
- Used as a basis for submitting accurate annual income tax returns.
- Used by financial institutions and potential investors to assess whether funding can be provided to businesses
Management accounts are prepared within one month of the period that it refers to. This allows management to make timely decisions.
Financial statements are prepared three months to a year after the annual period that it refers to. The information is less relevant for management decision-making purposes.
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