Having a clear understanding of your business’ financial position is essential if you’re going to make informed decisions affecting the company’s future. Over the years, accountants have developed a set of accounting reports designed to give you that understanding. For that reason, they’re known as management accounts.
Usually these accounts are prepared quarterly and monthly, meaning that they’re up-to-date enough to still be valuable tools for decision making.
Collating Information for Management Accounts
It’s vital to ensure you have everything you need when preparing management accounts.
You’ll need to:
Reconcile Financial Data
Collect and reconcile your accounts with as many cross-checks as possible – any incorrect information which slips past this point may affect your decisions. Modern accounting software will help with this, but it’s still important to apply a human eye here. Match entries on your bank statements against your invoices, receipts, etc., to ensure the accuracy of information.
Match Information to Time
As these accounts are either monthly or quarterly, your next step is to map income and expenses to the correct dates – and yes, this includes any work in progress, and all known future incomings and expenditures.
Once you have this information you can take your tax liabilities into account and you’ll be able to assess your net profit over the period. This is useful information, but it’s far from enough on its own.
Prepare Financial Statements
Always included in management reports are:
- A balance sheet
- A cash flow statement
- A profit and loss statement (often simply called a P&L)
The balance sheet gives you assets and liabilities at a glance. Your cash flow statement will show you the real state of your liquid assets. Lastly, your P&L shows you revenue and expenses at a glance.
These three reports are the core of management accounts. However, it’s not uncommon to incorporate additional statements assessing specific parts of your business.
A retail company with multiple physical locations, for example, will usually want custom reports showing each location as an individual revenue stream. Looking at which locations perform best may help the business decide where to expand next.
On the other hand, a consultancy with several major projects ongoing might have a report for each project, so they can assess the individual viability of each one.
These reports quickly highlight which areas of the business may not be bringing in much money. From there it’s a question of asking why that’s the case and whether they still need investment.
Create Executive Summary
The last step before management accounts see use is usually an executive summary. These are designed to highlight key data, and usually they’re produced in such a way that direct financial expertise isn’t needed to understand the reports. Ideally someone with that expertise should still be present when the documents are reviewed, in order to provide any extra explanation needed.
The person creating this summary should ideally be as impartial as possible. It’s always possible to slant these reports, either to disguise poor financial health in the company or to give extra weight to a favoured department. As these documents will be used to base decision on, any slanting could have serious knock-on effects down the line.
That’s one reason that many businesses ask their accountants to handle this task. Being removed from any internal politics, our goal is simply to provide you with the most accurate accounts possible.
If you’d like to discuss the preparation of these accounts, or a wider review of financial records, please just get in touch.
