Blog

What are they?

Management Accounts are financial reports that provide detailed and up-to-date information about a company’s financial performance and position. These reports are generated internally generally monthly for the purpose of helping business owners, managers, and banks make informed decisions.

Why do we do it?

Unlike formal financial statements like the annual balance sheet and income statement (profit and loss statement) that are prepared for external parties, management accounts are primarily used for internal management purposes.

The primary goal in any process of preparing a set of good management accounts is to simplify the numbers and provide Management with an understanding of the key financial components of their business.

The goal is to provide Insight to support better business decisions.

How do we do it?

It is a 3-step process

1. Clear the distortions
   • Make sure that Salaries and distributions to owners are market related?
   • Focus on Gross margin not on revenue
   • Proper accrual accounting – The goal of accrual accounting (as opposed to bookkeeping) is to match revenue and expenses
2. Identify the key financial ratios to track and set appropriate targets
   • Our previous blog on financial ratios introduced the significance of key financial ratios to evaluate business performance – insert blog link here
3. Use trend analysis to identify problems | root causes and actions to improve business performance
   • The next section explores this concept in more detail;

Why do we do this?

Small businesses can benefit significantly from maintaining management accounts on a monthly basis for several reasons :

1. Financial Visibility. By comparing month-to-month data, the business can identify trends, patterns, and fluctuations in key financial metrics. This monitoring helps in gauging whether the business is meeting its financial goals and objectives.
2. Decision making. With monthly management accounts, business owners and managers can make more timely and informed decisions. They can spot potential issues or opportunities quickly and take necessary actions to address them.
3. Cash Flow Management. Monthly management accounts provide insights into cash inflows and outflows, helping the business forecast cash needs and manage working capital more effectively.
4. Performance Measurement. Monthly management accounts enable the business to assess its profitability and efficiency. By analyzing key metrics such as gross profit margins and operating expenses, the business can identify areas for improvement and cost-cutting.
5. Debt & Investment Management. If the business seeks investments or loans, potential investors and creditors often require up-to-date financial information. Regularly produced management accounts demonstrate the business’s financial transparency and stability.

In essence, producing monthly management accounts provides a clear picture of a small business’s financial health and performance. This information is invaluable for strategic planning, decision-making, and overall business growth.

How do we do this ?

Preparing monthly management accounts for a small business involves setting up a systematic process to gather, organize, and analyze financial data regularly.

Set Clear Objectives. Define the goals and objectives you want to achieve with your management accounts. This could include tracking profitability, monitoring cash flow, assessing growth, and more.

Choose Accounting Software. Select an accounting software or platform that suits the size and needs of your business. Xero is our platform of choice. Their financial reporting library is easy to use and customizable.

Establish a regular cadence of bookkeeping and accounting. Regularly enter all financial transactions into Xero, including sales, expenses, invoices, bills, and other relevant data. Ensure that transactions are categorized accurately for proper reporting. (hyperlink Better quality accounting Blog)

Generate Monthly Management accounts and analyse for insights. Use Xero to generate the necessary financial statements for your monthly management accounts. Xero offers features to create reports such as the income statement (Profit and Loss), balance sheet, and cash flow statement. The ease of creating the reports in Xero means that we spend less time generating the reports and more time analysing the financial information looking for an identifying insights.;

Coordinate meeting with business owners | Managers. After you have generated the reports and understood the financial story, the final critical step is to coordinate a meeting with the business owner | managers to discuss the insights understand what the story is telling you about the business. The goal as mentioned at the start is to identify actionable insights that result in improvement in profitability and cash flow.

Reach out to us at hello@118accounting.co.za if you would like us to assist in establishing a management reporting process in your business.