Management accounting is the process of preparing and producing the financial reports for managers and business owners.
Most companies produce management accounts because they need to examine the financial health of the organisation. Preparing monthly management accounts is good business practice. They give a snapshot of your business position and can act as a benchmark to compare past and future performance.
Up-to-date, accurate business information is vital to sustainable growth. Leadership teams need to make decisions based on evidence, they can’t simply rely on their intuition. They need facts and figures to determine the reasons behind underlying problems, to assess the different options for taking action and, if necessary, changing course.
That’s why it’s also important that finance teams produce management reports as soon as possible after the end of each month. They’re providing key information that will be discussed in board meetings and used to plan business strategy. Monthly management reports also inform sales targets and budgets and enable managers to re-allocate resources effectively.
These reports are usually produced on a monthly or quarterly basis. They can be more personalised to your individual organisation’s requirements than the formal year-end financial reporting process. Whilst there is no set rule on when management accounts are prepared, they are usually produced on a monthly or quarterly basis to allow business owners to regularly monitor their finances.
It’s a legal requirement for limited companies in the UK to submit their statutory accounts to Companies House every year. Management accounts, on the other hand, are for internal use and there is no set format. In fact, they are most useful when they are tailored to the needs of an individual business and cover what is most important to the leadership team.
However, even management accounts are usually prepared on a regular and consistent basis so managers can monitor performance over time.
There’s no set format for producing monthly management accounts. What’s included will depend on the lifecycle stage of the business, its sector, goals and strategy. Generally, as a minimum, finance teams will produce management accounts that cover the organisation’s:
Key performance indicators (KPIs)
Your KPIs are likely to include analysis by region, country, department, product line and even individual team members. You may also prepare a cost of sales report showing expenses such as materials, production and marketing costs, some companies want reports detailing customer billing/monthly subscriptions. These key performance indicators are an effective way to monitor whether your business is performing to a level that meets your current long-term goals.
Profit and loss statement
This details revenues, costs and expenses. This is all key information to help managers understand the company’s current financial position. It helps them answer questions such as:
Profit and loss statements are an accurate way to predict business performance against monthly, quarterly and annual forecasts. Plus, it helps to understand exactly where your business is making money so owners can proactively invest more in ‘money-making’ departments and cut expenditures where needed.
Even a profitable company can go out of business if it runs out of cash to pay the bills. Visibility of your cash position (on at least a monthly basis) will help inform decisions around budgets, investments and funding or borrowing needs.
The balance sheet is a snapshot of the health of your business at a particular point in time. It normally consists of:
You are not bound to follow any set procedures, rules or processes when preparing management accounts. However, it is good practice to be consistent to enable historical comparisons. Management reports are of most value when they contain details pertinent to the organisation and the information is produced in a user-friendly, accessible format for use by colleagues across the business.
An executive summary on the first page of your management accounts can be particularly helpful. This highlights the important monthly facts and figures, any significant changes or red flags. For example, it may include net profit margins, turnover ratio, or losses incurred. It may also include a department summary, so leaders can monitor and compare performance across the business.
Preparing accurate and timely monthly management accounts brings valuable benefits across the business, not just in the finance team. The insights from these reports are key to running and monitoring your business. For example they:
Find out more about AccountsIQ’s advanced management accounting and financial reporting solutions.