What to include in your management accounts

By Joshua Bowen, Head of Outsourced Finance Function at Carpenter Box.

As a business owner, you need to have a clear understanding of the financial health of your company. This is where management accounts come in. Management accounts are a set of financial reports produced periodically that provide insights into the performance of your business. They are an essential tool for decision-making and can help you stay on top of company finances.

What is the difference between management accounts and statutory accounts?

Management accounts are a set of bespoke financial reports designed specifically for your business with the primary focus being to evaluate performance and assist with decision-making within your organisation. They’re prepared promptly after the period ends to provide timely insights into your business’s financial performance, allowing you to take proactive actions to achieve your goals.

In contrast, statutory accounts are prepared annually and are intended for use by external stakeholders, such as investors, creditors, and regulatory authorities. They must comply with accounting standards and provide a comprehensive overview of your company’s financial position, including detailed notes and disclosures.

In summary, management accounts offer real-time insights for strategic decision-making, while statutory accounts serve as a formal financial statement for external stakeholders.

But what exactly should you include in your management accounts? Let’s dive into the key elements that make up effective management accounts.

Profit and Loss Statement

At the heart of your management accounts is the Profit and Loss (P&L) statement. This financial report shows your company’s revenue, costs, and expenses over a specified period. It provides a clear picture of whether your business is generating a profit or incurring losses. Analysing your P&L statement allows you to identify trends, assess the impact of cost fluctuations, and make informed decisions to improve profitability.

The format of the P&L statement will differ by company to allow you to spot trends specific to your business / industry. Let’s take a café based on the seafront that will have a very high seasonal trade in the summer but much lower in the winter. If they were to run a P&L report that compares Q4 vs Q3 vs Q2 vs Q1 of the same year the numbers wouldn’t show you how the business has performed as the results would have lots of variances based on seasonal trends. To remove that seasonal variance, you would instead compare your quarterly performance to the same quarter in previous years i.e. Q3 2024 vs Q3 2023 vs Q3 2022. This would allow you to see how in the summer quarter the business performed compared to previous summer quarters.

Balance Sheet

A Balance Sheet is another critical component of management accounts. It provides a snapshot of your company’s financial position at a specific point in time. It lists your assets, liabilities, and equity, allowing you to gauge your business’s overall financial health. A well-prepared balance sheet can help you assess solvency, track working capital, and make informed decisions regarding investments and debt management.

Similarly to the P&L statement the Balance Sheet can be tailored to highlight to management the key areas they’re focused on. For example, the business may be highly geared with a focus on paying down debts. Under that scenario we would want to provide a lot more detail around the short term and long-term creditors, but perhaps summarise the assets as the detail behind these are less relevant given the status of the business.

Cash Flow Statement

Managing cash flow is vital for the sustainability of your business. A Cash Flow Statement is a key element of management accounting, illustrating how cash is flowing in and out of your business. It highlights the sources of cash (e.g., sales, investments) and the uses of cash (e.g., operating expenses, debt repayments). By closely monitoring your cash flow, you can identify potential liquidity issues and take corrective actions to ensure your business’s financial stability.

Budget vs Actual Report

In my opinion, a budget is one of the most important documents a management team can have in place. Without a budget you are essentially going into a trading period without knowing what you consider to be good / bad performance for the business. Comparing to comparative periods is useful but just doing better / worse than the previous period doesn’t mean a good / bad performance as there are several factors that should be considered. To gauge your financial performance accurately, a Budget should be prepared and then included within your management accounts a detailed Budget vs Actual report. This report compares your actual financial results against the budgeted amounts. It allows you to identify variances and assess whether you’re on track to meet your financial goals. If there are significant deviations, you can adjust your strategies and allocate resources more effectively to align with your business objectives.

Key Performance Indicators (KPIs)

Incorporating Key Performance Indicators (KPIs) into your accounts is crucial for monitoring the performance of specific areas of your business. KPIs are metrics that measure the effectiveness of various aspects, such as sales, production, or customer satisfaction. By tracking KPIs, you can identify strengths and weaknesses within your business and make data-driven decisions to optimise operations and drive growth.

It is important to note that KPIs do not need to be financial, and in my opinion the best KPI metrics are ones that considered both financial and non-financial metrics. For example, a financial metric might be fuel costs for a logistics business and let’s say these costs have gone up by 30% on last year. In isolation that sounds very bad. If you added a non-financial metric such as delivery miles completed, and delivery miles had increased by 50% on last year then suddenly that 30% cost increase looks positive because it shows our cost per delivery mile is decreasing.

Now that we’ve covered the essential elements of management accounts, you may wonder how they differ from full accounts.

By including these elements in your management accounts, you’ll have a clear understanding of your company’s financial performance and be able to make informed decisions to drive growth.

Ready to take control of your finances?

At Carpenter Box, we specialise in providing management accounts to small and medium-sized businesses. Contact us today to learn more about how we can help you prepare effective management accounts and take control of your finances.

If you are interested in finding out more, please get in touch with us on 01903 234094 or visit www.carpenterbox.com