To successfully grow a business, one must be able to monitor their money and measure their performance throughout the year. Management accounts are an incredibly useful tool for this, as they help identify trends, plan for growth, and can also provide insights that can assist in decision making. In this article, we look to explain what management accounts are, why they are used, what they are composed of, and when you typically need them.
What You Will Learn
1. What are management accounts
3. What is included in a management account?
1. What are Management Accounts?
Management accounts are financial reports that track various financial figures and metrics, and provide insight into the current financial health of a business. These accounts are used by business owners and management for their day-to-day, and long-term strategic decision making and are often prepared routinely on a monthly or quarterly basis.
2. Why are Management Accounts Used?
As mentioned above, management accounts are used for day-today or long-term strategic decision making. To be more specific, they are often used for the purposes of:
Helping Grow a Business
- To grow a business, one needs quality and up-to-date information.
Better Control Cash Flows
- Management accounts provide the latest cash flow information for business owners to quickly identify trends in revenue and costs. This can help a business avoid any identified crisis situations that can be potentially costly.
To Assist With Tax Planning
- Accountants often rely on management accounts when predicting a company’s potential tax liabilities
- For instance, in Hong Kong, tax representatives will often utilize management accounts to determine whether Hong Kong tax authorities have accurately calculated a company’s profits tax liabilities
Improve the Audit Process
- Auditors will often request for documentation that can support a company’s financial statements and will frequently refer to management accounts
- Properly maintaining management accounts in a routine manner can help identify accounting issues as they arise, allowing businesses to act promptly, rather than trying to correct all errors as they are identified during an audit
3. What is Included in a Management Account?
Management accounts typically outline a business’:
Cash Position
Cash flow statements will track the inflow and outflow of cash for a business and are usually amended on a monthly basis. For example, it will outline the cash received for a month as compared to the prior month, the amount spent, any changes to the business’ cash reserve and the closing bank balance.
Management accounts can help a business owner get firm control over their cash flow, and enables them to manage their business finances more effectively. The information provided can help identify trends and situations where cash outflow can be minimized.
Profit and Loss
Profit and loss relates to how income and expenses flows in and out of a business. Understanding a business’ profit and loss is essential to predicting the actual business performance of a company.
Balance Sheet
Balance sheets is a financial statement that lists out a business’s assets, liabilities and equities. They are used to help provide clarity on the financial standing of a firm.
Often, new business owners will be unfamiliar with many accounting concepts and principles. Cloud-accounting solutions such as Xero offer their users templates to help create various management accounts, including balance sheets.
Executive Summary
Executive summaries are composed of important highlights. For instance, the profit margins, turnover ratio or expenses are often highlighted in an executive summary. In addition, executive summaries can often highlight the performance of different areas of a business, allowing business owners to compare and contrast how well one particular area of their business is doing as compared to others. This should make it easy to identify which aspects of a business are succeeding, and which are underperforming.
Key Performance Indicators (“KPI”)
KPIs are industry and business specific indicators that are used to track how effectively a company is achieving their business objectives. KPIs are often used to evaluate their success in reaching set goals.
Many cloud accounting solutions offer the ability to pick and choose what KPIs you want tracked. By combining this function with the other various tools available, business owners should have various indicators available to them to reveal whether they are in line with their long term business goals.
4. When Do You Need It?
Management accounts should be used whenever a business owner or management wants to better understand a business, or when they want to refer to factual information to improve their day-to-day or long-term decision making.
Management accounts are also often used by external parties. For instance, auditors or tax representatives will also commonly request management accounts during an audit, or when calculating the potential profits tax liabilities. These parties will often request these documents to help determine whether a business’ financial statements are completed in a true, fair and complete manner or to confirm the profits tax liabilities outlined by local tax authorities.
5. Templates
Often, new business owners will be unfamiliar with many accounting concepts and principles. This can create difficulties when drafting management accounts. Cloud-accounting solutions such as Xero offer their users templates to help create various management accounts, including balance sheets and profits and loss statements!
Enhancing Your Accounting With FastLane
To grow and develop a business, it is very important to understand all aspects of it. Management accounts and the information they provide are a fantastic way for business owners to gain this understanding. For questions about how a management account can help your business or how to access them with your cloud-accounting solution, please contact the FastLane Group!