Management accounts. Not a phrase that sets the pulse racing, is it? But they’re actually the beating heart of your business and the key to helping you monitor, review and improve your financial performance and having a handle on your finances is what drives success.
So, what are management accounts?
Management accounts are a set of monthly (or quarterly) financial statements showing the profitability and financial health of your business, so-called because they are the essential numbers your management team needs to work out the performance of the business.
They are bespoke profit & loss reports that show the actual performance against budget and also the profitability of each service or department in the business. That’s a lot of data to take in, but these numbers are fantastically useful for you as a business owner.
Why is monthly reporting so important?
We all know about annual statements, the statutory accounts which show the state of the business on a yearly basis. But annual accounts always show data from the past, sometimes as much as 18 months in the past! And that’s a problem if you want to know the financial state of your business right now.
Management accounts are run every month. So the information is more up to date and therefore more relevant when it comes to making strategic decisions. It’s not about legal box-ticking and keeping HMRC happy; it’s about timely information that helps you see exactly how you’re performing.
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For control
You can’t view your business profitability based on your bank balance, or even the number of sales you made last month. What about your costs? Have you actually done the work that’s generated those sales yet? Have you taken out a loan, with the knock-on effect of ‘boosting’ your bank balance? Have you loaned money into your business? Management accounts show you exactly where your money is going, and how profitable you actually are.
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They show the full picture
Business owners are constantly asking ‘What’s my profit?’. But although profit is important (and it definitely is!) it’s really only half of the picture. The other half is your Balance Sheet. This shows what the business owns versus what it owes, and gives you the overall health of the business. It shows what would actually be left in the business once it’s paid off all its debts (this is known as your ‘Net Assets’).
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Cash flow
Ever wondered why you seem to be making lots of sales, think you’re profitable but never seem to have any cash in the bank? The answer to this comes from your cash flow statement, which shows exactly what has come in and gone out of your business during the month.
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Sales and costs analysis
Knowing your projected sales and costs for the year allows you to then break this down into a monthly budget. Management accounts let you see how you’ve performed against the budget each month. Any areas of fluctuation or costs spiralling out of control can quickly be identified and decisions made as a result – before it’s too late.
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Departmental or service-led reporting
As well as knowing the overall profit for the month, you can also drill down into the specific profitability of each service you provide, or each department in your business. And that can be extremely revealing.
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Tax planning
Don’t you hate it when you get a surprise tax bill? Well, with monthly management accounts, you’ll know each month exactly how much you need to keep aside for tax. So at the year-end you’ll have this money in the business (preferably in a savings account) so that you can easily pay your tax bill on time and avoid any interest being added.
Monitor the heartbeat of your business
Keeping a close eye on the health of your business is the key to making it profitable and successful. Monthly management accounts give you the tools to assess your current business performance, highlight any issues, and make better-informed strategic decisions for the future of the business.
We use Xero cloud accounting software for all our clients, and the flexibility of Xero means we can pull out the reporting you need to make sure the company’s on track. There are even specific management reporting add-ons, like CrunchBoards, that can add a whole new level of insight into the profitability of your enterprise.
Read more about how Xero is perfect for your business – and particularly for digital creatives.
