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What Are Management Accounts? (Including Some Good Examples)

Management accounts examples

Every business requires ongoing financial reports to ensure the company’s financial health is optimal – these reports are compiled from the management accounts. Management accounts provide crucial information about the company’s ongoing financial performance.

Management accounts are internal financial reports which normally include a profit and loss report and balance sheet. In contrast, statutory accounts are legally required financial statements filed with regulatory bodies.

Typically, management accounts are prepared on a monthly or quarterly basis for the company owners, they are used to better understand the company’s finances, identify trends, and make informed business decisions; they are crucial to company success.

In the following article, we take a closer look at management accounts to identify what they are and why they matter, who creates these accounts, and how they differ from statutory accounts. If you want to understand management accounts for your business, read on.

What Are Management Accounts?

Management accounts are internal financial reports containing tailored information to a company’s managers to support the performance of a business. These reports include a detailed analysis of revenue, costs, profits, cash flow, and liabilities over a recent period.

Management accounts complement statutory financial statements and allow managers to regularly track finances and spot issues and opportunities – they can also model scenarios and adjust business practices. Management accounts are crucial to a company’s growth.

Why Are Management Accounts Important?

No matter the size of the business, management accounts are needed to track performance and ensure profitability. These internal reports are tailored to provide detailed information to company managers on business performance, some of the metrics tracked include revenue analysis, company profits and overheads, cash flow, assets and liabilities, and many more.

While statutory accounts are legally required for tax and regulation purposes, management accounts are internal financial statements required for effective business operations.

These reports track finances closely, identify issues and opportunities, model scenarios, and adjust the business plan to changing market conditions: management accounts help drive growth.

Your business needs management accounts for optimal performance and to help:

  • Inform business decisions – Since the bottom line is the best measure of success, management accounts must be used to inform decisions, budget, and strategies.
  • Monitor performance – Utilising management accounts allows the business to closely monitor performance and take corrective action sooner rather than later.
  • Identify trends – Management accounts provide helpful insights into accounting trends in the business which can further inform business outcomes and success.
  • Financial planning – Thanks to regular baseline data from management accounts, businesses improve their financial planning leading to better optimised budgets.
  • Manage risks – Operating a successful and progressive business means eliminating risks where possible. Management accounts flag risks before they create issues.

Management accounts can be viewed as a granular breakdown of financial data which informs managers and owners of financial performance, potential risks, and new trends.

How Can Management Accounts Help A Business? 

There are several reasons why management accounts are important for companies:

  • Inform decisions – Internal accounts enable data-driven decisions for various operations such as, budgets, targets and strategy.
  • Monitor performance – They allow close tracking of all financial KPIs and include corrective actions.
  • Identify trends – Internal accounts highlight development opportunities, risks and new market forces.
  • Enable planning – They provide baseline data for budgets, forecasts and models.
  • Manage risks – Internal reports reveal financial issues before they escalate.

In short, management accounts enable a granular understanding of business performance so that managers can guide better decisions.

Contents of Management Accounts

The exact content of management accounts varies by company, but they often include:

Core financial statements

  • Profit and loss
  • Balance sheet
  • Cash flow statement

KPIs and ratios

  • By business unit, product, region
  • Trends versus targets
  • Industry benchmarking

Departmental analysis

  • By cost centre
  • Income/expense drivers
  • Performance factors

Commentary and notes

  • Qualitative context
  • External events
  • Ongoing initiatives
  • Emerging risks

Common management account practices blend financial statements, KPIs, drilled-down data analysis and insightful commentary; it provides an integrated perspective to inform business planning and prompt a deeper and more consistent understanding of a company’s account.

Producing and Consuming Management Accounts

It’s important to create consistent management accounts that are tailor-made for a business. Well-formulated management accounts require specialised expertise at several key stages including:

Data collection – It’s crucial for accountants to acquire the most complete and accurate input data for current accounts.

Reconciliation – All data must be crossed-checked and validated to ensure accurate results.

Categorisation – Management account data should be categorised appropriately for reporting purposes.

Report production – Appropriate accounts must be populated with correct data for scheduling and reporting.

Diagnostic analysis – management accountants must analyse data to identify variances and trends, asking challenging questions for better outcomes.

Root cause analysis – It’s important for management accountants to avoid easy answers, they must dig into financial performance, commercial management, and macro dynamics.

Insight reporting – Informed and actionable insights should be delivered to managers in relation to financial performance and results.

Collaborative review – Collaborate with leadership teams to address financial risks and identify performance opportunities.

Distribution – All departments within an organisation should be informed of recent financial reports.

Financial reporting using management accounts is an in-depth and collaborative process to inform all departments of recent analysis and to support new strategies and decision making.

Integrated Reporting

“Integrated reporting” is evolving into fully integrated financial and non-financial insights connecting financial performance to business model execution for external value creation.

Examples of non-financial metrics include:

  • Sustainability KPIs
  • Customer satisfaction
  • Process quality
  • Risk management factors
  • Innovation indicators

This multi lens perspective can support sharper insights into performance drivers. Integrated reporting is seen as the future for advanced management accounting in the business world.

How Management Accounts Differ from Financial Statements

While complementary, statutory financial statements and management accounts have distinct objectives; one is focused on legal compliance, and the other on performance.

Statutory Financial Statements

  • Primary objective – Legal and tax compliance
  • Audience – External stakeholders
  • Content – Financial position focused
  • Frequency – Quarterly and annual

Management Accounts

  • Primary objective – Inform business decisions
  • Audience – Internal management
  • Content – Performance focused
  • Frequency – Monthly and quarterly

Statutory financial statements provide compliance overviews for the business, while management accounts offer regular performance insights to guide better decisions.

What Information Do Management Accounts Include?

While the exact content of management accounts will vary depending on the company’s specific information requirements, they tend to include fundamental information, such as:

Core financial statements

  • Profit and loss statement
  • Balance sheet
  • Cash flow statement

Performance metrics

  • Sales volumes and revenues
  • Profit margins
  • Costs per unit/service
  • Expense ratios
  • Working capital metrics
  • Customer metrics
  • Marketing and sales metrics

Trend comparisons

  • Month-to-month trends
  • Year-over-year comparisons
  • Budget vs. actual variance analysis

Segment and departmental reporting

  • Breakdowns by business unit
  • Product/service line reporting
  • Departmental expense analysis
  • Geographic segment analysis
  • Customer cohort analysis

Contextual commentary

  • Explanations of major variances
  • Market condition changes
  • Impact of new initiatives
  • Notes on one-time income/expenses
  • Ongoing business risks

Companies should start with the core financial statements, then define the specific KPIs most relevant for monitoring each part of the business. Adding segmental analysis, trends and commentary provides a comprehensive, contextual picture of financial performance.

How Are Management Accounts Produced?

Producing accurate and reliable management accounts involves several steps:

Data collection – Compile relevant financial data from sources such as accounting software, bank transactions, invoices, contracts and other systems: the information should be complete, accurate and timely.

Reconcile accounts – Cross-check data from different sources to confirm accuracy and reliability, identify and fix discrepancies.

Categorise transactions – Organise income and expenses into standard reporting categories for easy analysis and comparisons.

Analyse data – Before preparing final reports, undertake preliminary analysis to identify anomalies, test theories on revenue and cost drivers, and answer specific questions from management on emerging trends.

Prepare draft reports – Populate profit and loss Statements, balance sheets and other reports using the collated, reconciled and categorised data.

Review analysis – Financial experts further analyse the draft reports to identify variances, trends and other signals relative to budgets, forecasts and strategic priorities.

Finalise reporting – Refine analysis and notes, address any data corrections needed, include relevant events/risks, and produce visual charts.

Distribute to management – The complete management accounts package is then distributed to business leaders across the organisation: meetings explain key themes.

Producing insightful management accounts requires a broad understanding of operational context alongside financial statement analysis. Reporting the numbers is the foundation of management accounts, but explaining what they mean for the business is the real value.

Example Management Account Excerpts

Below are two brief, simplified examples to illustrate the level of analysis in management accounts:

Profit & Loss Highlights – Quarter 3, 2023

AccountQ3 ActualQ3 BudgetVarianceQ3 2022
Revenue£1.9m£2.1m-£0.2m£1.8m
Gross Profit£0.72m£0.83m-£0.11m£0.68m
Operating Costs£0.51m£0.48m+£0.03m£0.46m
EBITDA£0.23m£0.35m-£0.12m£0.19m
EBITDA Margin11%17%-6%11%

Revenue missed budget by £0.2m due to supply chain delays stalling product launches, but still showed 5% growth on prior year. Gross margin remained steady at 36% as cost inflation was passed to the market. Higher operating costs stemmed from increased staff and additional marketing to protect market share amid competitor discounting. EBITDA contracted but matched previous Q3 margin.

Balance Sheet Highlights – September 30, 2023

AccountSep 2023Jun 2023Dec 2022
Cash£0.42m£0.61m£0.51m
Inventory£1.7m£1.5m£1.6m
Accounts Receivable£1.2m£0.9m£1.1m
Total Assets£5.1m£4.9m£4.7m
Accounts Payable£2.3m£2.0m£2.2m
Total Liabilities£3.2m£3.0m£2.9m
Shareholder Equity£1.9m£1.9m£1.8m

Working capital decreased due to inventory build-up from supply delays and rising sales requiring more receivables funding. Cash reserves are still adequate but tighter than ideal. Debt service coverage ratio dropped to 1.3x so agreed enhanced lending terms with the bank. Tighter covenants may constrain strategic options if sales targets are not met. Overall financial health remains stable but little room for further balance sheet deterioration.

These examples show the level of financial detail and explanatory context contained in well-formulated management accounts. The numbers tell the story while the notes provide critical analysis.

These examples show the level of financial detail and explanatory context contained in well-formulated management accounts. The numbers tell the story while the notes provide the kind of critical analysis required to inform managers of the company’s financial health.

Who Prepares, Reads and Uses Management Accounts?

Preparation – Management accounts are drawn-up by in-house or outsourced accountants, who understand the company’s finances at a granular level–it’s crucial for financial management accounts to create accurate accounts that align with operational actualities.

Reading – Management accounts are designed specifically to meet the information needs of managers in the organisation. The accounts team sets out key topics and analysis required to monitor performance with customised reporting aligned to their income statements.

Use – Managers use the accounting data to track budgets, analyse profit drivers, control costs, drive efficiency, identify investment opportunities and maintain stakeholder confidence. These insights help managers at all levels to make more informed decisions.

How Management Accounts Differ From Statutory Accounts

Statutory accounts and management accounts serve different purposes for different audiences within the organisation; however, they are mutually reinforcing processes.

Statutory Accounts

  • Purpose – Provide standardised financial statements to investors, regulators, tax authorities and other external stakeholders according to the legal requirements.
  • Content – Include balance sheet, income statement, statement of cash flows and statement of changes in equity.
  • Standards – Prepared using UK GAAP, IFRS or other accounting standards: audited externally to assure accuracy.
  • Frequency – Annually with half-year interim updates in some cases.

Management Accounts

  • Purpose – Provide detailed financial analysis to company management for internal monitoring and decision making.
  • Content – Flexibly tailored to the company’s internal reporting needs, additional metrics like KPIs and detailed departmental breakdowns are included.
  • Standards – No mandated structure but should align with statutory reporting.
  • Frequency – Monthly or quarterly to provide timely, frequent accounts visibility.

In summary, statutory accounts adhere to legal standards for external stakeholders while management accounts offer flexible internal reporting focused on business decision making rather than compliance. Both present a consistent perspective on the company’s finances.

Conclusion

Management accounts and statutory accounts contribute to a business in different ways. Management accounts provide regular financial insights to inform better decision making on an ongoing basis and support companies to navigate dynamic market conditions. These reports connect operational data points to macro performance factors and industry trends.

Management accounts are evolving to include financial and non-financial factors to provide a more holistic and integrated approach to financial insights. Businesses now realise that a multifaceted approach offers a sharper understanding of operational drivers and market forces. State-of-the-art “integrated reporting” connects model execution and value creation.

Modern management accounts are crucial to the success of a business, but integrated reporting is also complex and specialised. It’s important for businesses to enlist accountants with the right skill sets to ensure the best financial analysis, business operations, and cross-functional collaboration. Hiring the right employees ensures modern accounting.

With volatility the new normal, data-driven integrated performance reporting is becoming mandatory. Organisations serious about pursuing excellence should view elevating management accounting practices as an urgent strategic priority. It’s clear the future will favour data-driven financial decisions and modern multifaceted accounting processes.

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