Consistent financial reporting needs to be a core part of your financial strategy to ensure sustainable business growth.
Naturally, year-end accounts will form the backbone of your reporting – but, for a full picture, don’t stop there.
To properly carry out your growth strategy, you will need to understand cashflow, profitability and overall performance throughout the year.
This is where management accounts come in as an indispensable tool to guide your decision-making.
Understanding management accounts
Management accounts are similar to year-end accounts, but they are usually produced informally.
They are done for the benefit of directors or other stakeholders, rather than to comply with legal requirements.
They will look different and contain different information depending on the size of your business, the sectors you work in and who they are for, but they typically contain:
- A Balance Sheet
- A profit and loss report
- Specific data requested by the individual
For example, you may request an expense report to identify whether expenses are reasonable or not.
Unlike year-end accounts, monthly or quarterly management accounts don’t have to contain all key financial information regarding your business.
Their purpose is to illustrate how well the business performs, tailored to individual requirements.
Are management accounts mandatory?
Management accounts are not mandatory. In fact, the majority of small businesses don’t produce them at all.
There are a number of reasons why this is the case, including:
- Time – Many small businesses rely on every minute of every member of the team to succeed, so they may lack the time to produce these accounts in-house.
- Cost – Business owners may perceive producing management accounts to be costly or to take time away from income-producing work.
- Misinformation – It is a common misconception that management accounts are highly complex or inaccessible to non-finance professionals.
- No formalised system – Small businesses may lack a formal accounting system which makes it easier to access ongoing financial reporting.
If you choose to produce management accounts, it’s up to you how often you do it and what information goes into them.
Why should SMEs produce management accounts?
Management accounts do not need to be complex and time-consuming to benefit stakeholders and paint a broad picture of the business.
They are useful for identifying your margins, trends and profitability.
Management accounts are used by directors and managers of a business, but they’re also useful to lenders, accountants, financial planners and investors.
If you want to produce management accounts but think you don’t have the time or ability, here’s how you can create space for this vital indication of your overall business health:
- Focus on one goal – To make sure you only use the necessary data and streamline your report, focus on one goal, for example, on growing the business and its revenue, or on reducing expenses.
- Communicate – Remember that you don’t have to spend a lot of time and effort on a formal presentation, instead book a quick call with your stakeholders or discuss via email.
- Start simple – As a small business, start by producing management accounts monthly and including only the essentials, building from here once you know what works for your stakeholders.
- Professional support – If you don’t have the time or know-how in-house, we can offer accessible and affordable support in creating your management accounts.
Ultimately, management accounts are beneficial to stakeholders of any business. With a small amount of information, you’ll be able to see how your business is performing and make adjustments throughout the year.
For help with your management accounts, please contact a member of our team today.