Why Management Accounts Are Just As Important As Statutory Returns

Business accountants James Todd & Co analyse why management accounts should provide an accurate picture of a company's current position

Every business appreciates the need to prepare statutory year-end accounts, a mandatory filing requirement used to report company performance to Companies House and submit Corporation Tax computations.

However, management accounts are too often considered a 'nice to have' rather than a necessity that even the busiest leadership teams should make time to prepare, review, and incorporate into key decision-making.

In this article, business accountancy specialists at James Todd & Co look at why and how management accounts matter and why businesses should allocate necessary resources to extract a meaningful, accurate picture of their finances and revenues.

What Are the Benefits of Producing Regular Management Accounts?

Management accounts are valuable insights into how a business is doing now. This aspect is important – a set of financial statements produced at year-end show how the company performed over the previous 12 months.

Anything included within the accounts has happened already. Regardless of the actions taken, it is unlikely to change, which often means missed opportunities or irrecoverable losses that could have been avoided.

Business owners and directors need to know the current, real-time issues affecting productivity, contributing to positive or negative cash flows, and influencing the organisation's financial health.

Relying solely on annual profit and loss statements and balance sheets does not provide the necessary information and data to be proactive, agile and decisive when a process, product or department isn’t functioning as it should – or seize an emerging trend to capture additional turnover and profitability.

The Link Between Information Extracted From Management Accounts and Business Success

Using a retail company as an example, a set of monthly or quarterly management accounts might show:

• Declines in order volumes for a particular product or range of products, meaning the company can reduce forward order volumes to avoid expensive overstocks or ramp up marketing for that product to utilise existing inventory.
• Increasing demand for an alternative offering. This knowledge means procurement teams can buy additional units to keep pace with their customers, improving profits, sales volumes and customer experiences.
• Projected bottlenecks in cash flow which could pose a problem if there are no cash reserves available. Having that information in advance ensures decision-makers can decide on the right solution, such as implementing a line of credit, delaying discretionary purchases, or using invoice finance to cover large purchase orders for products yet to be sold.

This quick illustration shows just three potential ways management accounts are beneficial. Still, they can go far beyond this and deliver business intelligence that creates transparency and accountability for shareholders and other stakeholders.

Regular reports, analyses and assessments lead to more accurate forecasting and projections, far greater insights into how the business is performing, and no tricky questions when a year-end set of financial statements produces some unexpected negatives.

What Does a Set of Management Accounts Include?

The frequency of your management accounting depends entirely on your business and requirements, but most companies generate reporting monthly or quarterly. The larger the organisation, the more involved the reporting requirements, and the more complex the business structure, the more often management accounts should be produced.

These internal accounting reports also look similar to any statutory returns, with a cash flow statement, balance sheet, profit and loss report or income and expenditure statement.

Some businesses will also produce more detailed management accounts, with data related to specific KPIs or covering other areas of the company that managers, owners and shareholders would like to review in greater depth.

While there is no mandatory need to produce management accounts, and they are rarely shared with third parties, it is good practice to have a regular reporting schedule to maintain consistent standards and avoid any issues falling through the cracks.

In some instances, such as when applying for financing or grant funding, a company will be expected to provide an up-to-date set of management accounts covering the period from the end of their last financial year to the present.

Why Invest Company Resources in Regular Management Accounting Processes?

As the name indicates, management accounts are a resource created primarily for business management. Producing reports shouldn't take excessive time since most of the information can be extracted from your accounting software – something we commonly do for our accounting clients by logging into cloud-based accounting systems as authorised advisers.

If you are unsure whether management accounts will add real value, consider the below questions and how you might answer these without regular reporting:

• Is the company performing against the targets set?
• Which products or services are selling better/worse than expected – and which are generating the most profit?
• Are our costs consistent with our forecasts, or are some overheads over budget?
• Are profits fluctuating between months, or are we achieving steady revenues and profit margins throughout the year?
• How are our overheads, including staffing costs, changing – are they rising or falling in line with profits and turnover?
• Do we have a steady cash flow, or will there be a point at which our outgoings exceed our income?
• Will the company plan to pay dividends this year, and what is the expected profit share based on projected net profit?

It may be useful to create a similar list of questions relevant to your business, helping your accountancy team or in-house finance colleagues pinpoint the reports and information most applicable to your decision-making.

By finessing the questions you need to answer and which will make the most significant difference, you can optimise your use of management accounts and ensure you always have clarity over costs, revenues and performance.

How Are Management Accounts Helpful in Year-End Accounts Preparation?

The main reason many businesses find year-end accounting stressful and time-consuming is that they need to complete processes such as stock checks and valuations, calculating accruals and prepayments, reconciling accounts and entering transactions.

Producing management accounts removes much of this time burden. It effectively spreads the workload over the year, making generating statutory reports much easier and faster at the end of the financial period.

Rather than an extra task, management accounts provide a huge amount of information that can be essential to business success while efficiently using time to assist with compliance and highly efficient reporting.

For more information about how management accounts could be beneficial for your company, or to discuss our management accounts preparation services, please get in touch with the James Todd & Co team at any time.

Read more about James Todd & Co - How To Get Business Bookkeeping Under Control - The Long Term Approach 

About James Todd & Co

James Todd & Co have been providing accounting services for more than 30 years across Sussex and Hampshire for businesses in Chichester, Lavant and Fareham accountants. Their clients trust them to provide bookkeeping, financial auditing and compliance, management accounting and financial advisory services.

***

Source Company: https://www.jamestoddandco.co.uk/