Management accounts might be a familiar term to you. But, do you know what are they; what’s their purpose, and why are they important?
You don’t know right! So, just give our blog a 2 min read to know about them.
What are the Management Accounts?
These accounts provide you with financial information to manage your business effectively. They are the detailed reports produced for business owners and managers to make business decisions. These accounts are also used by banks, lenders, investors, and tax planners.
The accounts generally include a balance sheet and profit and loss statement generated on a monthly and quarterly basis. Conceptually, they are similar to the Year-end accounts but are less formal, short-term, and targeted.
There are five key components :
1. Key Performance Indicator (KPIs):
They provide KPIs for your business as they are of vital importance for your business. While choosing KPIs, you should be wisely making decisions. With assistance forecasting and financial forecasting, you can determine whether you’re in line with your business goals or not.
2. Executive summary:
It is the monthly report of your business. It includes your business’s gross profit, expenses, turnover ratio, and losses, etc. Every department should have a separate highlight to determine their progress. This summary should be on the first page.
3. Balance sheet:
The balance sheet is one of the most important documents that let you know the financial position of your business. It shows assets, liabilities and owners’ equity.
4. Cash flow statement:
It shows the financial health of your business that is recorded on a monthly basis. With cash forecasting, it lets you know how much your business is going to earn in the near future. This helps owners to control their cash flow to make financial decisions effectively.
5. Profit and loss statement:
Profit & loss statement shows the incomings and outgoings of your business. It depicts the accurate progress report of your business made within a month, a quarter, and a year.
Why are Management Accounts Important?
These accounts help you to boost your business progress through analysis and financial reporting. Here are some of the objectives :
- They provide measurable and controllable information based on past performance for future improvement.
- They are beneficial to avoid cash flow problems and to control liquidity.
- They create a visible future for your business.
- They determine the areas to increase the profitability of the business.
- These are helpful for better tax planning and to reduce tax liabilities.
- By preparing these accounts, you can lower down your year-end audit and accounting costs.
- They show key performance indicators (KPIs) for the better future of your business.
As a whole, these accounts are necessary for knowing the time to time progress and development of your business. Besides, it indicates the future of your business. As it is said that if you measure you’ll improve.
We also advise you to get the help of an accountancy firm that will provide you the required information and expertise to prepare your management accounts, saving your time and money.