Management accounting is a familiar business term, but it’s not always clear what it is, or why management accounting is important.
It’s different from producing your year end accounts. You’re not required by law to produce management accounts, and you don’t have to submit them to HMRC. Why do them then? Because they’re a valuable source of information and analysis on which you can build strategies. Compared to annual accounts, management accounts may not be as detailed, but they provide essential financial analysis and interpretation.
The information your management accounting reports provide assists with developing insight and knowledge that in turn shapes and refines your business planning.
What Do You Mean by Management Accounting?
Management accounts are financial reports, which you produce regularly to give you a clear picture of how your business is performing. The clue is in the name; they’re management accounts because they help you manage your business. Therefore, management accounting is the process of completing and providing your management accounts.
Understanding management accounting can be difficult simply because there isn’t a standard process for doing it. Management accounts are about helping you manage your business, therefore they should be specific to your business, supporting its goals and strategies. The final structure of your management accounts will depend on the information that’s important to you.
A management accountant should be able to provide you with this information, tailored to fit your requirements. However, what they also bring is a professional eye for analysis, adding crucial value to your data.
Typically, a company should produce management accounts at least quarterly, if not monthly. Their effectiveness in supporting business planning depends on them being accurate and up to date. Therefore, the more frequent they are, the more relevant the data that forms the basis for their financial analysis will be.
What Does a Management Accountant Do?
A management accountant goes beyond looking at a company’s income and expenses. This role carries a considerable weight of responsibility because it crosses into business consultancy territory.
Essentially, it’s not just about the figures, but what the figures mean. With this in mind, what are the primary functions of management accounting?
The role of management accounting covers:
- Preparing, developing and analysing financial information for an organisation’s management team
- Establishing and maintaining financial policies and management information systems
- Liaising with management on all aspects of finance.
A management accountant looks to the future, using detailed analysis of a business’s financial figures to assess its performance.
Typical responsibilities for a management accountant include:
- Preparing financial statements on a regular basis
- Analysing financial performance for business planning and forecasts
- Supporting various departments in a business, including management, over financial decision-making
- Interpreting financial data for non-financial managers
- Helping to keep spending in line with budget
- Advising on and helping to put together key strategies
- Advising on financial implications of business decisions
- Offering professional judgement on financial matters and advising on methods for improving business performance
- Monitoring and measuring financial information systems and suggesting improvements where appropriate
- Putting corporate governance procedures in place, including internal controls and risk management.
Responsibilities in management accounting can vary, depending on specific business requirements.
What Should Management Accounts Include?
Management accounts will be bespoke to the business they’re for, but typically, they will include analysis of the following:
- Profit and loss
- Cash flow position
- Balance sheet
- Key performance indicators (KPIs).
At a glance, an income statement will show whether a business is operating at a profit or a loss. However, management accounting techniques will interrogate this information, giving it a context by digging deeper. It may for example, compare month-by-month data, breakdown profitability by department or activity.
It can look at how actual income and forecast income compare.
Management accounting will delve into a company’s balance sheet, looking at issues such as liabilities over time, and how well the business manages debt.
KPIs are the measurable goals a company wishes to achieve within a defined timeframe. These may be financial goals, performance-based or a combination of both. Management accounts will look at these in the context of actual figures, and make any necessary recommendations based on this analysis.
The aim of management accounts is to provide business managers and management teams with relevant and valuable information. This information should be business-specific, and to the point.
Who Uses Management Accounting?
Management accounts are not generic in the way that your normal accounts are.
They aren’t put together for the benefit of HMRC, or to comply with legal requirements or regulations.
They are specifically tailored to an individual company’s needs, and the company’s management should be able to use them to support its planning and decision-making.
Because of the specialist nature of management accounting, some businesses may be put off from using it as a resource.
However, because management accounting is very much bespoke by definition, it can provide valuable support to a broad range of enterprises, including small businesses.
People who use management accounting include:
- Business owners
- Business investors
- Banks and lenders
- Tax planners.
Management accounting can become a useful tool in helping businesses accomplish certain tasks, measure performance, or make vital changes to the way they operate.
- Creating a more disciplined form of financial control
- Uncovering bad practices
- Checking and controlling the cost of overheads
- Controlling stock levels
- Managing the capital working cycle, including debtors, creditors and stock
- Establishing break-even points for profitability
- Gaining at-a-glance information from KPIs.
Management accounting can support pricing and marketing strategies too. You can use them to measure your gross margin percentages over time.
Once you have this visibility of your margins, this can help you decide on the best strategies and tactics for improving productivity.
In some situations, increasing sales by cutting prices will be the best option. However, in others, actually putting prices up may be the better tactic, depending on the gross margin of your product.
With the detail and analysis that management accounts provide, you can fine-tune various aspects of your business, while not losing sight of your overall objectives.
Why Management Accounting is Important
Running a business successfully requires clarity.
This clarity should provide the solid foundations upon which to base decisions, as part of a comprehensive business plan.
By having a proper, accurate and insightful analysis of your figures, you can understand your profitability, your margins and trends in the performance of your business.
The benefits of keeping regular management accounts are that they support the following essential activities:
- Monitoring your growth
- Optimising processes
- Planning for the future
- Attracting funding.
You can use management accounts internally and externally. Internally, for business planning and optimising the way you work; externally to attract investors and funding, or to reassure lenders.
Comparing your management accounts monthly or quarterly enables you to monitor your financial growth and your performance. For example, you can use management accounting to breakdown your clients by category of late or on-time payments.
Sound analysis of your current revenue makes it easier to forecast future earnings, or to assess risks more accurately. Management accounting can help spot patterns and trends, such as seasonal changes in cash flow, which you can build in to your future planning.
The better your business plan, the more likely you can attract investors. Bolstering it with management account information demonstrates a clear focus and commitment to monitoring and improving performance. This can help unlock future funding for you.
How Do You Produce Management Accounts?
The basics for producing management accounts include a good accounting system. Cloud accounting software such as Xero is ideal for this.
Like any tool, however, accounting software is only as effective as its user. Accountants are trained to make sense of numbers. They understand what data they should be extracting, and how to interpret it for you.
A professional, chartered accountant specialising in management accounting will provide you with the essential management account information and analysis you need.
The other key component in producing your management accounts is you. These accounts are tailored to suit your specific enterprise or organisation, and to support your business plans.
A key role of management accounting is to listen to you, to understand your needs, and to provide you with the information you need based on your financial figures.
Are Management Accountants in Demand?
There is a high demand for management accountants because they play an important role in business development, helping inform commercial business decisions.
Effective use of management accounting services can put a business at a competitive advantage, drawing on expert knowledge and analysis to underpin strategic planning.
The incorporation of cloud accounting into management accounting adds further value to this service, making it more readily accessible to businesses of different sizes and types.
Outsourcing management accounting offers a scalable, affordable and flexible solution for businesses looking for ways to improve their overall financial management, business planning and performance.
The provider of your management accounts must be reliable and trustworthy, since you will very likely use this information as the basis for making important business decisions.
Management Accountants Near You
As cloud-based accountants, Venn Accounts can provide management accounting services to any businesses across the UK. We offer a personalised management accounts service which is built around providing our clients with key financial insights to help SME’s grow with confidence.