How to Use Management Accounts Effectively

Why Every Business Should Have Management Accounts

Management accounts are a vital tool for businesses to make informed decisions and plan strategically. Unlike financial accounting, management accounting focuses on providing internal financial information to key decision makers such as CEOs / Managing Directors, FDs / CFOs, and the wider senior leadership team. By understanding the role of management accountants and the significance of management accounts, businesses can unlock numerous benefits. In this article we will explore the key features of effective management accounts and how to use management accounts in business.

What are Management Accounts?

Management Accounts, also known as MI (Management Information), are internal financial reports created for the purpose of assisting management in understanding financial performance and making informed strategic decisions. Whilst the Finance Director (FD) or Chief Financial Officer (CFO) has an obvious interest in the company’s management accounts, their valuable information is also vital for business owners, directors, and the wider senior management team. They provide insights into the financial performance, value and cashflow of the business and typically consist of a Profit & Loss (P&L) report, Balance Sheet, and Cashflow. Each is compared to a predetermined budget to highlight variation from plan. Effective management accounts present the performance of both the current period and the year-to-date to ensure that the business maintains its performance trajectory throughout the year.

What are the Benefits of Management Accounts?

There are numerous benefits to using management accounts effectively in your business. These include:

• Improved decision making
• Improving profitability
• Cost Control and Efficiency
• Performance Evaluation
• Comparing actual performance against budgets / forecasts
• Giving peace of mind that you know where your business is heading financially

You can read more about the benefits of management accounts in business in our article The Benefits of Management Accounting.

The Difference Between Management Accounts and Financial Accounts

There are some key differences between management accounts and financial accounts.

Purpose: The purpose of management accounts is to aid management understanding and decision-making, whereas annual accounts are designed to comply with statutory financial reporting requirements.

Audience: The primary audience of management accounts is internal; the management team, and other key stakeholders incluing the bank, while annual accounts are primarily aimed externally including Companies House, customers, suppliers, and other stakeholders.

Frequency: Management accounts provide regular information throughout the year, ideally monthly, allowing business owners to make decisions and take action to improve performance based upon current trends. By contrast, financial accounts are produced annually and often several months after the end of the financial period meaning that the by the time the information is available, it is not current. It also only provides a snapshot of the entire year rather than the monthly breakdown shown in management accounts.

Budget Comparison: Management accounts provide comparison against budget to help management track progress against the plan. This is not a feature of financial accounts.

For these reasons, the presentation of management accounts is designed to provide management with analysis and insight that leads to decisions and action to improve future performance.

The Key Features of Effective Management Accounts

An effective set of management accounts will have the following features:

• Customisation: Management accounts should be tailored to the specific needs and requirements of the business. They can focus on key performance indicators (KPIs), cost centres, departments, or any other relevant aspect of the business.
• Variance analysis: Management accounts often include variance analysis, which compares actual results with budgeted or forecasted figures. This analysis helps identify the reasons for any discrepancies and enables management to take corrective actions if necessary.
• Timeliness: Management accounts are prepared on a regular basis, ideally monthly but in some cases quarterly, to provide up-to-date information to management. They are presented in a timely manner, allowing managers to make informed decisions promptly.
• Cost analysis: Management accounts often include detailed cost analysis, breaking down expenses by category, department, or product/service. This helps management identify areas of high or unnecessary costs and take appropriate actions.
• Key performance indicators (KPIs): Management accounts often present KPIs that are relevant to the business’ objectives and strategy. These indicators may include sales growth, profitability ratios, productivitym material usage, return on investment (ROI), and any other appropriate metrics.
• Cashflow analysis: Management accounts include cashflow statements and forecasts that show the inflows and outflows of cash during a specific period. This helps managers understand the organisation's liquidity position and plan for any cashflow challenges in the future.
• Interpretation for Decision Making: Management accounts serve as a tool for decision-making by providing relevant financial information and insights. They assist management in evaluating investment opportunities, pricing decisions, cost-saving measures, and other strategic choices.

Review of Management Accounts

With an effective set of management accounts prepared each month, the final step is to make time to review and discuss them as a board of directors and senior management team. A monthly board / management meeting is the ideal time to do this. It’s important to have clear interpretation of the numbers so that decisions can be made and actions set. An experienced FD or CFO is the ideal person to ensure you are on top of your finances.

How to Recruit a Fractional FD / CFO For Your Business

Organising Fractional FD or CFO services with Secantor is easy - simply get in touch and we'll manage the rest. Our FDs are professionally qualified, experienced and available when you need them. You needn't worry about fit because our team are tried and tested in a variety of businesses and industries so you can hand pick your own Fractional FD based on your specific needs. If you are looking for support to complete a specific project or cover a vacancy for a defined period of time, please read about our Interim FD services. As well as providing expert financial services, we can improve your business with Non-Executive Director and Operations Director services too.

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What Our Customers Have to Say

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