Nearly all businesses need to prepare regular management accounts in order to monitor and control their finances and trading activities. In fact, directors are required by law to maintain accounting records sufficient to disclose with reasonable accuracy the financial position of their companies at any time, so it could be argued that management accounts, in the most liberal sense of the word, are a statutory obligation. However, the detail contained within the management accounts and the frequency with which they are produced will depend upon the size and type of business they relate to.
At their simplest, management accounts may consist of no more than a statement of sales income, an analysis of expenses and a breakdown of trade debtors, plus maybe a calculation of how much tax the business owes. Indeed, for many proprietors this is all the information they really need. However, most businesses will require more complex accounts than this, including a detailed P&L, a balance sheet, a cash flow statement and a full analysis of fixed assets, stock, debtors and creditors. It is also likely that management accounts will need to be produced monthly or at least quarterly if they are going to be of any use at all in running the business. And of course they must be timely. Out-of-date accounts are nothing more than a history lesson!
Phased accounts showing income and expenses on a monthly basis are the most common format as it is easy to detect trends and see when and where the more material items are arising. If a business loses a couple of major customers and starts trading at a loss, this can be picked up straight away. It is surprising how many small businesses get into this situation and don't even realise they are making losses until the cash starts to run out and there are still a lot of bills to pay. The accounts can also be used to work out your breakeven point; i.e. what level of income is required to cover your fixed costs.
Apart from running the business, there are other good reasons for preparing regular management accounts. Your bank will probably want to know how the business is getting on if you have an overdraft, loan or merchant account. They can even be used to negotiate better credit terms with your bank or suppliers, assuming that they paint a good picture of course. They are also useful for declaring dividends. Unless your accounts for the previous year show a sufficient level of retained profits, it will be necessary to prove that dividends come out of distributable reserves. You can only do that if you can show that you have made enough profit since the year end to cover the excess. Otherwise they could be overturned and treated by the Revenue as participator loans, or even worse as remuneration subject to PAYE.
At Acumen we can help you produce management accounts that are just right for your business, neither too simple nor too elaborate. We can give you an idea of the kind of information that might prove useful to your business, such as a project cost analysis so you can see how much profit each product or project is contributing to your bottom line, or a time spent analysis so you can see how many staff hours your clients take up compared to the fees they pay you. Please give us a call if you would like any help with your internal reporting.
The following information sheets and accounting tips will give you a more detailed idea of what can be done with management accounts: