What are the benefits of management accounts?

Do you create management accounts for your business? If so, do you make full use of them? Are you aware of the benefits that management accounts can bring to a business? Are you unclear about what management accounts are?

Most people have heard of management accounts, but not all businesses produce them. Management accounts are financial reports produced for business owners and directors, usually on a monthly or quarterly basis, and will generally include a profit and loss (P&L) account and a balance sheet.

They are very like end-of-year accounts but less formal, more tailored and the major benefit is their frequency.

Management accounts offer real-time information and that information is essential for owners/directors wanting to make sure their business is on track.

Sitting down and talking through management accounts provides an opportunity to look at how the business is performing and also to make decisions on changes needed to rectify any issues.

Here’s an example. If margins are being eroded, management accounts will make this clear immediately. If, by contrast, this is only spotted when end-of-year accounts are produced, think how much profit has been lost and how much could have been clawed back if changes had been made the minute the problem arose.

Management accounts also provide a great opportunity to compare performance on a year-on-year, quarter-by-quarter, or even month-by-month basis. Delving into why changes have taken place – why profits are up, or down – will help inform what should happen next.

Management accounts may also reveal patterns or seasonal variations in buyer or supplier behaviour, which may not be obvious by looking only at end-of-year accounts.

All business could benefit from producing management accounts, but they are particularly useful for fast-growing business.

Increasingly, at Optimum we have clients who are asking us to produce management accounts. We sit down with the figures – whether monthly or quarterly – and go through them with a fine-tooth comb, interpreting the information and acting as a trusted adviser to the business owner, focusing on their forward journey.

For example, we have a new construction client who has opted to look at his management accounts with us. He realised, when he saw his end-of-year accounts, how useful it would have been to have accessed the information throughout the year.

We’ve spotted volatility in his margins, which was due to missed invoicing. This can now be rectified and the invoices issued in a timely fashion rather than waiting until this is highlighted at the end of the year.

With another client we spotted an anomaly and were able to help him identify there was a stock issue; the volume of stock actually on the shelves didn’t tally with the figures. It took some working out, but the numbers don’t lie, so we kept digging until we found the cause of the problem. If this issue had been left to fester for a year, it could have seriously impacted the business.

If you would like to talk to us about producing and analysing management accounts, where we interpret the figures for you, talk them through and give you sound advice, so you can keep moving forward, then email me, Optimum Accounts Director Michael Blaken, [email protected].