Most businesses find it useful to phase their Management Accounts on a monthly or quarterly basis. You can see straight away how each month or quarter compares with the next and it is easy to detect trends and see when and where the more material items are arising. This can enable the directors to focus on activities that are not doing so well and either take action to improve them or divert resources to activities that are more profitable.
It is also possible to spot losses as soon as they start to occur (and sometimes even before then) so that remedial action can be taken before the situation becomes critical. It is surprising how often this happens in practice. A business can be trading for a long time at quite a healthy profit and then suddenly it loses a couple of key customers. The directors are probably aware that the business is not doing as well as it used to, but until someone sits down and works out all the monthly costs and revenues, it may not be apparent that it is now actually making losses. Often the first sign is that cash balances start to run down and there are still lots of bills to pay. The same situation can occur more gradually when overheads start to go up without an equivalent increase in sales revenue.
For management accounts to make any sense whatsoever, you must know where your sales revenue is coming from. For a service company, this can be a simple analysis of turnover by customer so you can see who is paying what. For organisations with a large number of customers, it would probably be best to focus on the larger ones and put the smaller customers on one line, or analyse turnover by the type of service you provide. Retailers will probably benefit from an analysis by brand, product, customer type or region. They would also need to know the margin on each one, so the cost of sales must be analysed in exactly the same way based on known net rates.
Businesses making their own products will also need to know the margin for each product or region but here the cost of sales will probably be more difficult to calculate as it will require an allocation of material and labour costs between different products or sales outlets. In this situation a unit cost approach is often used to value the direct costs and calculate the margins.
Phased accounts lend themselves very well to service companies as fees are often charged on a monthly basis. The allocation of sales revenue to each month can then be based simply on invoices. However, fees are often charged annually or even on a one-off basis. In this situation, sales revenue should be allocated to months based on contractual obligations. This is common with maintenance contracts or subscriptions. For example, an annual fee could be split equally across the term of the contract if the service to be provided is the same at all times, or weighted to individual months if one element of the contract, such as an annual inspection or an upgrade, occurs at one particular time.