Most UK companies are used to filing their end-of-year financial accounts – consisting of reports such as profit and loss accounts and balance sheets – to Companies House each year. But when it comes to management accounts, many SME owners are much less familiar. This could be a missed opportunity.
Management accounts are created for internal use within a business, and can be tailored to show key financial data that helps the company to improve decision making. “Many small companies don’t create management accounts from day one, although the earlier you start using them, the better,” says Jaz Notay, managing director at financial consultancy Ellora. “Once you start using management accounting, you have much better insight into how your business is performing and what lies ahead.”
Management accounting definition
Management accounting involves creating a tailored set of detailed accounts that can be used to help your business make better strategic decisions. These accounts can be tailored according to the needs of your business to include both current and projected detailed data on sales, staffing, and other metrics.
Most management accounts are based around the items that would also commonly be found in financial accounts, but the information is built out in more detail and includes forward-looking predictions, says Notay.
“Management accounts will include expenses and revenue, for example, but we might split revenue so that you can see revenue by product, or we might group expenses so that you can see staff costs separately from other labour costs,” he says.
Why is management accounting important?
When you run a business, it’s easy to think you’re doing well when you might actually be heading for problems, says Laura Beales, co-founder and CFO of Tally Market.
Tally Market is an online marketplace selling corporate space, from single desks for co-working to large offices and event spaces. The company uses monthly management accounts created in its accounting software to track costs and revenues, with the ability to drill down and see detailed information on cost and customer trends.
With 500 venues and more than 300 corporate customers, the company has thousands of transactions each month, at different price points. “Our management accounts help me to track cash flow and profits, which would be easy to lose track of in a fast-growing company like this,” says Beales. “By tracking the day-to-day operations, we can identify efficiencies that help to drive profit.”
How does management accounting work?
Most management accounts are produced on a monthly or quarterly basis, depending on how a business executes its regular accounting. As you start to adopt management accounts, Notay suggests thinking about the core data sources and how this information will be shared with your accountant, or accounting software system.
The core elements for most management accounts include:
- Sales and invoice data.
- Opening and closing stock for the period.
- Invoices from the business and purchase orders.
- Budgets for specific items, departments, or spending categories.
- Targets for key performance indicators.
- Previous year’s trading figures (if available).
Simple management accounts can be generated in accounting software packages such as QuickBooks and Xero, and many high street banks now offer management accounting software alongside business accounts. These tools are useful in capturing a daily snapshot of how a business is performing, and identifying trends over time, says Notay.
At Tally Market, the company has streamlined its data sources to provide all the information Beales needs in one place. For example, once a month she uses the management reports to track the customer acquisition activities and account set-up costs against customer lifetime value, based on the average customer spend for a set period.
“We also look at how quickly we’re able to get paid, so that we can maximise cash flow and long-term profitability,” she says.
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When to use a management accountant
For more complex management accounts and for larger businesses with more complex budgets and business requirements, it is a specialist job for a qualified management accountant, says Notay. In all but the biggest companies, it’s wise to consider using a skilled management accountant agency that can work on accounts for one day per week.
“The problem with doing your own management accounts and using an in-house bookkeeper or accountant is that you don’t know what you don’t know,” he says. “You can pull data and look at figures, but an experienced management accountant can help you to understand the challenges your business is facing, based on experience working with similar organisations. They will be able to build bespoke accounts that will track the right metrics and data to help you solve those challenges.”
What are the differences between management accounting and financial accounting?
A key difference between management and financial accounting is that management accounts look at current and future performance, whereas financial accounts tend to look back over a quarter or a full year, says Beales.
Another notable difference is that management accounting can offer monthly or even daily updates on business performance.
Management accounting techniques
For UK businesses, there is no single agreed-upon technique to approach management accounting, says Notay, since they are prepared to fit the needs of the business.
"Most organisations will start with the GAAP (Generally Accepted Accounting Principles) template for financial accounts [1] and then break down and expand figures as they need," she says.
This could involve bringing in other data to show relationships between business activities and financial data, or examine data over time to reveal trends and support forecasting.
For example, a business could take financial accounting data on sales revenue, but use management accounts to show a series of data points revealing trends in revenue over multiple periods. This could then be used to support forecasting. Alternatively, a business could take a financial accounting data set such as profit, and analyse this against a specific cost, such as payroll.
“By bringing in employee data and payroll data, you could start to analyse how much profit you’re making per hour of labour and track that metric to see if the business is over- or under-resourced,” says Notay.
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Sources:
[1] ICAEW, UK GAAP
