What’s the difference between your company’s annual accounts and management accounts? The former is a statutory obligation, for external consumption; the other is a powerful business tool, designed to help you.
Annual accounts are put together based on your business’s day-to-day records, usually looked after by a bookkeeper or accounts administrator, if you have one, or by accountants like us.
This process is called ‘financial accounting’ and is all about providing a ‘true and fair’ representation of how your business is performing for the benefit of HMRC, investors and lenders.
That’s important, and can be useful internally, too. But when it comes to making business decisions, financial accounts aren’t in the same league as a proper set of management accounts.
What makes management accounts so useful?
Here’s the simplest way to put it: management accounts are like a set of year-end accounts you get every month, with a story attached.
Businesses that don’t do management accounting sometimes only get a sense of how their business is performing at year-end when they review the annual accounts and see their estimated tax bill.
By that point, it’s too late to change course or take remedial action if something’s not quite right. All they can do is learn the lessons and hope for better next year.
Management accounts, usually presented monthly or sometimes quarterly, give you the opportunity to fix problems – and grab opportunities – in-year, on the move.
In my experience, the most dynamic, ambitious businesses all engage with management accounting sooner or later because they love the control and agility this information provides.
What does a management accountant do?
Again, there’s a short answer: they act like a manager as much as an accountant.
In other words, they go beyond merely presenting accurate numbers and also provide context, narrative and practical recommendations.
They use data of all kinds, not just financial data, to build a complete picture of how your business is performing. That will typically include things like sales, revenue, cashflow, debt and credit.
Because accountants are used to working with numbers, and using tools to slice and dice them in different ways, we’re good at creating statistics you can track as key performance indicators.
Monitoring budgets is a big part of it, too. Budgets aren’t crystal-ball predictions, and will never be 100% spot on. But If either spending or income is way over or under what was estimated when budgets were set, that should ring alarm bells.
We’re also good at spotting anomalies – all those years of training in reconciling accounts means we can spot an outlier a mile off. In terms of management accounting, that means we can spot problems with individual business units which might suggest fraud, theft or simple underperformance.
Equally, we’ll also be able to identify where things are going unexpectedly well – sometimes even if there’s only a hint of a trend to be seen with the naked eye. That helps management leap on opportunities and do more of what’s working, while it’s working.
Management accounting also covers improvements to internal systems and processes, financial and otherwise, to reduce costs, improve efficiency and profitability.
It’s future-focused, too – not just about reporting on what’s already happened. Management accounts include forecasts, so management can make the right moves to stay ahead of the game.
Talk to us to find out more about management accounting and for help monitoring your business’s performance.