Management accounts are regular financial reports that show how a business is performing. They are usually prepared monthly or quarterly. They help, you as business owners understand your income costs and profit during the year instead of waiting until the end of the year.
Management accounts often include a profit and loss report, a balance sheet and sometimes a cash flow statement.
These reports are mainly for the business owner, managers and sometimes for external parties such as banks or lenders. They are also used when a business is being sold for the buyer to assess the profitability.
Why management accounts are important for small businesses
For a small business management accounts are very useful. They help you see how your business is doing right now not last year. This means you can make better decisions sooner.
Management accounts can help you
- spot problems early such as rising costs or falling sales
- plan your cash flow and avoid running out of money
- decide when you can afford to invest or hire staff
- feel more confident when talking to banks or investors
Instead of guessing or using the state of the bank account to help you manage the business you can use real numbers to guide your decisions.
The difference between annual accounts and management accounts
Annual accounts are prepared once a year. They are a legal requirement for limited companies. They are used for tax returns and are submitted to HMRC and Companies House. Annual accounts look at the past and show what happened during the last financial year.
Management accounts are prepared during the year. They are not a legal requirement. They are for internal use only. Management accounts look at the present and help you manage the business as it grows.
How to get Management Accounts
You can get management accounts from your bookkeeping system such as Xero but the report you run be accurate without some key adjustments, such as:
- Depreciation this is spreading the cost of assets like equipment or vehicles over their useful life
- Accruals these are costs that relate to the period but have not yet been paid or invoiced
- Prepayments these are costs paid in advance such as insurance or rent that relate to future months
- Regular reviews to check the adjustments often, so the figures stay accurate
Final thoughts
Management accounts give small business owners better visibility and control. They help you understand your numbers make informed decisions and grow your business with confidence. When used alongside annual accounts they give you a much clearer picture of your business health.
But Management accounts take time and work to get right. Naturally these come at a cost to small businesses and unless you are looking to grow the business or sell it you may decide they aren’t worth he costs.
Our thoughts are that if you truly want to know the value your business generates and want to make some real decisions based on the numbers then they are essential.
