If you receive a set of management accounts every month, what do you actually do with them?
For many business owners, management accounts arrive as a pack of financial information containing a profit and loss account, balance sheet, cash figures and perhaps a few KPIs.
But receiving management accounts is not the same as having useful management information.
Good management accounts should help you understand what is happening in your business, why it is happening, what might happen next and whether you need to do anything differently as a result.
For a growing SME, that is the real purpose of management accounts.
They shouldn’t simply tell you what happened last month. They should help you run the business.
What are management accounts?
Management accounts are financial reports produced for the people running a business.
Unlike statutory accounts, which are prepared for external reporting purposes, management accounts are designed to help owners and management teams understand performance and make decisions. There is no single prescribed format. In other words, the right management accounts for one business may look quite different from those needed by another.
For example, a professional services firm might be particularly interested in utilisation, staff costs and project profitability.
Whereas a product business might focus more heavily on gross margin, stock and working capital. And a recurring revenue business may want to understand customer retention, recurring revenue and the cost of acquiring new customers.
The important question is not simply about which reports are included. Instead, the question is: Do those reports give you the information you need to run your particular business?
What should management accounts include?
For most growing SMEs, monthly management accounts will usually include some combination of the following:
- A profit and loss account
- A balance sheet
- Cash and cash flow information
- Actual results compared with budget
- A forecast for the months ahead
- Key performance indicators relevant to the business
- Information on working capital, such as customers who owe you money, suppliers you need to pay and stock where relevant
- Commentary explaining important movements, risks and opportunities
But the presence of these reports doesn’t automatically make the management accounts useful. A ten page finance pack full of numbers can still leave a business owner none the wiser. The better test is whether your management accounts allow you to answer the questions that matter.
Are we making the profit we expected to make?
Knowing that the business made a profit last month is useful. Knowing whether that profit was £50,000 better or £50,000 worse than expected is much more useful.
Your management accounts should therefore compare actual performance with your budget or plan.
If revenue is lower than expected, you should be able to understand why.
- Did you sell less?
- Did a project move into the following month?
- Did a major customer leave?
- Did prices change?
- Did sales mix change?
The same applies to costs.
Simply knowing that costs increased doesn’t tell you enough. You need to understand whether that increase was planned, whether it produced the expected return and whether it is likely to continue. The numbers should help you understand the question:
Why are we ahead of or behind budget?
A budget is most useful when you compare it with what actually happened. That comparison is often referred to as variance analysis. But variance analysis should be more than a list of differences.
Imagine your monthly accounts show that payroll costs are £20,000 higher than budget, a number that immediately creates more questions.
- Was somebody recruited earlier than expected?
- Was the original budget unrealistic?
- Has overtime increased?
- Did you need contractors to deal with unexpected demand?
- Is this a one off cost or will it affect every remaining month of the year?
The answer matters because it affects what you do next.
Good management accounts should help you move from:
“Payroll is £20,000 over budget.”
to:
“Payroll is £20,000 over budget because we recruited two people earlier than planned. Revenue from that additional capacity is expected to start next month, so we need to update the forecast but no immediate action is required.”
That is management information.
Are our margins improving or getting worse?
Revenue growth on its own can be misleading. After all, a business can sell more and still make less money.
That is why understanding margins is so important.
Your management accounts should make it possible to see whether your gross margin and operating margin are moving in the right direction.
If margins are falling, you should be able to investigate why.
- Perhaps supplier costs have increased.
- Perhaps your pricing has not kept pace with costs.
- Perhaps the mix of work has changed.
- Perhaps one service or product is much less profitable than another.
- Perhaps additional staff were recruited ahead of growth.
The important point is that management accounts should help you identify these changes early enough to do something about them.
Which parts of the business are actually making money?
A single profit figure for the whole company can hide a lot.
Imagine a business with three service lines.
Overall, the company is profitable.
But one service produces a healthy margin, another barely breaks even and the third consistently loses money.
If your management accounts only show the total result, you may never see that clearly.
Useful management information should reflect how you actually run the business.
Depending on the company, that might mean looking at profitability by:
- Product
- Service
- Customer
- Project
- Location
- Team
- Business unit
This doesn’t mean producing endless reports. What it means is identifying the few ????dimensions???? that genuinely affect your decisions.
Where is our cash?
Profit and cash are NOT the same thing.
A profitable business can still experience serious cash pressure and your management accounts should therefore give you visibility over both.
If profit looks healthy but cash is falling, you need to understand what is happening.
- Are customers taking longer to pay?
- Has stock increased?
- Have you made a large VAT or corporation tax payment?
- Have you invested in equipment?
- Have you repaid borrowing?
- Has the business grown quickly and created a bigger working capital requirement?
Looking at profit without looking at cash can give a misleading picture of the health of the business.
For many growing SMEs, understanding where cash is tied up is one of the most important things management accounts can tell you.
Is anything starting to go wrong?
One of the most useful roles of management accounts is to provide an early warning.
By the time a problem becomes obvious from the bank balance, you may have fewer options available.
Good management information can highlight deterioration earlier.
- You might see debtor days gradually increasing.
- Gross margin may fall for three consecutive months.
- Sales may still be growing, but new enquiries may be slowing.
- A particular cost may be consistently above budget.
- A major customer may represent an increasing proportion of revenue.
None of these things necessarily means there is a crisis, but they are signals worth understanding.
This is where trends are often more useful than individual monthly numbers.
Looking at six or twelve months together can make patterns far easier to spot.
What does this mean for the rest of the year?
Management accounts are historic as they tell you what has already happened. But the best finance functions use that information to improve their, and your, view of what will happen next.
If performance in the first four months of the year is materially different from budget, it’s unlikely that the original full year budget is still the best estimate of where you will finish.
That is why management accounts and forecasting should work together. Your latest actual results should feed into your forecast.
- If revenue is slower than planned, what does that mean for the rest of the year?
- If margins are stronger, will that continue?
- If recruitment has been delayed, how does that affect costs and capacity?
- If cash collection has deteriorated, when might that become a problem?
The aim is not to predict the future perfectly.
It is to keep updating your expectations as new information becomes available.
What should we do differently as a result?
This is probably the most important question of all.
If your management accounts do not influence decisions, you need to ask what purpose they are serving.
Useful management accounts might lead you to:
- Change pricing
- Reduce or delay expenditure
- Recruit sooner
- Delay recruitment
- Focus sales effort on a more profitable service
- Chase overdue customers more actively
- Renegotiate supplier terms
- Change your forecast
- Hold more cash
- Investigate an emerging problem
Not every month needs to result in a major decision. But every month should leave the leadership team with a clearer understanding of the business.
How quickly should management accounts be produced?
Timing matters.
Management accounts that arrive many weeks after the end of the month lose much of their value. There is no perfect timetable for every SME, but the principle is simple:
The information needs to arrive while there is still time to act on it.
A highly complex business may need longer to close its accounts than a straightforward service business.
What matters is having an appropriate month end process, clear ownership and reliable data.
If producing the accounts involves repeatedly chasing information, manually correcting spreadsheets or reconciling the same issues every month, the problem may sit within the finance process rather than the reporting itself. A slightly different issue which is also worth addressing.
How much detail should management accounts contain?
More detail is not always better.
One of the most common problems with financial reporting is that the important information becomes buried.
A founder doesn’t necessarily need dozens of pages of numbers. They just need the right numbers, presented clearly, with enough explanation to understand what matters.
A useful management pack might contain only a relatively small number of measures if those measures genuinely tell management what they need to know.
Before adding another report or KPI, ask:
What decision would this information help us make?
If nobody can answer that question, it may not need to be there.
Who should explain the management accounts?
As a business grows, the finance function should increasingly do more than prepare the numbers.
Someone needs to interpret them. That someone might be a CFO, Finance Director, Head of Finance or Fractional Finance Director, depending on the size and complexity of the business.
Their role is much more than simply saying:
“Revenue was £500,000 and profit was £70,000.”
They are there to explain:
“Revenue was 8 per cent below plan because two projects were delayed, but gross margin was stronger than expected. We therefore expect the revenue shortfall to recover next month and have not changed the full year forecast.”
That explanation is what turns accounting information into commercial insight.
How do you know if your management accounts are good enough?
Ask yourself if, after reviewing your latest management accounts, you can confidently explain:
- How the business performed?
- Why it performed that way?
- Where cash is moving?
- What is changing?
- What could become a problem?
- What you now expect to happen?
- What action, if any, you need to take?
If you can’t do that, the issue may not be that you need more reports. You likely need better management information.
Management accounts should help you run the business
For a growing SME, management accounts should be much more than a monthly accounting exercise. They should connect what has already happened with the decisions you need to make next.
That means understanding profit, cash, margins, performance against budget, the drivers behind the numbers and the implications for the months ahead.
The goal isn’t to produce the most sophisticated finance pack. It is to give the people running the business the information they need to make better decisions.
And if your management accounts arrive every month but rarely change what you discuss, question or decide, that is probably the first thing worth reviewing.
Ready to understand just how much information is held within your management reports? Get in touch to discuss how one of our Fractional Finance Directors could help your business scale.
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