28 August 2018
Management accounts are an indispensable business tool and new technology has made it easier than ever to tailor them to the needs of your organisation.
Management or financial accounts?
It’s not something that we hear quite as often as we used to, but some clients occasionally say: “I’ve brought in my books for you to send to the taxman”. Many business people still see the function of annual (or financial) accounts as primarily to ascertain the tax liability. Financial accounts do indeed fill a compliance function. They are historical, measuring the performance of a business over a year that has now ended, and their users include HMRC, Companies House, lenders, investors, shareholders and sometimes suppliers or significant customers. They are also rather formulaic, having to comply with Generally Accepted Accounting Principles and (for incorporated businesses) Company Law.
Financial accounts can and should be used to assist decision-making but given that they are often produced up to nine months after the year-end, they normally paint the picture of the business as a whole, not of individual sectors or divisions, and as such, they have their limitations as a management tool.
A decision-making tool
Management accounts, in contrast, are produced mainly for the use of the organisation’s managers or owners. The Chartered Institute of Management Accountants describes management accounting as “analysing information to advise business strategy and drive sustainable business success.” Management accounts are usually produced on a monthly basis, or sometimes quarterly or even weekly, and are therefore timely. They present information within days of the period-end to enable decisions to be made or remedial action taken as early as possible, thereby capitalising on opportunities or saving costs and reducing waste.
There are many benefits:
- Control of costs
- Setting targets
- Identifying profitable and non-profitable products or customers
- Identifying effective and ineffective departments or managers
- Sharing relevant data with managers to improve performance or reward effective team members
- Measuring actual performance against budget to facilitate remedial actions
- Monitoring cash flow
- Managing working capital, e.g. debtors, creditors and stock
- Researching better working methods
- Identifying and monitoring key performance indicators
- Identifying seasonal factors and separating them from longer term trends
- Supporting decisions on dividends or remuneration, so that these can be paid out earlier, thus motivating staff and business-owners.
- Providing regular information to lenders
Above all, good, timely management information can alert you to developing problems, enabling you to take action that can save your business from catastrophe.
Focus on the factors that drive your business
The term ‘management accounting’ can be misleading. Not all of the information presented in management accounts is traditional financial or accounting data. Your management reporting should be set up to track and measure information about any aspect of your business that is quantifiable. This could include, for example, the amount of product per person per hour, analysed by product or by department. It could include sales analysed by salesperson or by region, or percentage of sales enquiries converted to actual sales. It could present the costs of manufacture of each product, enabling you to take a ‘make or buy decision’, i.e. to decide whether to buy in a component or manufacture it yourself. The list of possibilities is long and varied, but you, as the business-owner or manager, will know the factors that drive your business and your monthly management reporting should concentrate on measuring these and alert you to significant variances.
There is possibly one disadvantage. The capture of relevant data and its analysis can become a time-consuming and expensive chore. Only larger or very complex businesses should ever consider recruiting additional staff to perform this function. Also, if you find that you have a tendency to ignore the monthly reports you are either receiving too much information or data that isn’t relevant to your management role. The knack is to tailor your bookkeeping function to produce monthly reports that are useful and provide interesting insights into the performance of your business. Your computerised bookkeeping package should be set up to do this. Don’t overlook the power and efficiency of cloud accounting. Most cloud accounting packages have applications that can provide phenomenal insights into the performance of your business. If you would like to know more about cloud accounting read our information sheet.
If you would like to find out more about how management accounts could provide you with invaluable information and transform your business, please get in touch.
As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.