In their simplest form management accounts inform the business owner and/or management team of the key numbers for their business. Every business is different and the key numbers will vary according to the type of business and even within different departments.
The majority of businesses who choose to work with us have never received management accounts and only really know how their business has done once the accountant has drafted their tax return or statutory accounts several months after their year end. So when we ask if they would like regular management accounts we usually have to explain what these are.
So what are Management Accounts?
As bookkeepers we prepare monthly or quarterly accounts for businesses and provide them with management reports once the accounts are complete. These reports are an ongoing record of how the business is performing and when compared with previous reports show variances in income and expenses. We usually provide a set of reports depending on the business needs but for every business we produce a Profit & Loss report. Where there is a purchase and sales ledger we will also provide annotated creditor and debtor reports. A balance sheet completes our standard set of reports although many business owners don't need this.
We do encourage our clients to come and discuss their reports with us to help them understand what the reports are telling them and so that we can find out if we can provide them with any additional information which would be useful to them.
There are many business owners who would ignore a Profit & Loss report because they don't know what all the numbers mean, so below is an explanation of what the Profit & Loss report will show a business owner and how to make sense of it if you receive one.
Profit & Loss Report
This is probably one of the most informative reports. It shows how the business has performed for the period either monthly or quarterly. From this report the business owner will be able to see the total income in the month and if the income is split into different categories (rather than just being recorded as Sales) they will be able to see what income has been earned in each category.
Below this is a group of expenses known as Cost of Sales - the purchases which have been made which relate to the sales in the month. Professional service firms may have a very low cost of sales but a manufacturing company or a plumber buying materials may have a high cost of sales. It is important to understand that the purchase of materials during a month may not specifically relate to the sales made in that month - the materials may have been purchased towards the end of the month for work being started at the beginning of the next month. However as the months go on the materials costs will balance out with the income. These figures should always be reviewed together as they will give you an idea of how much you are spending on materials in relation to the income you are receiving.
Where possible we try to ensure that the cost of sales are split in relation to income categories. For example if you are selling chocolates and biscuits we would split both the sales and the purchases into two categories - chocolates and biscuits. You can then see the profit made on each category.
The final part of the Profit & Loss report shows the overheads. This is where you should be checking your costs to see how they compare to previous months and previous years and to see where you can save money. You will also see instantly if you have any costs missing. Maybe the wages weren't paid by the end of the month so you have considerably more profit than you would have expected, or maybe two months wages were paid in one month so you are showing a loss. Good bookkeepers will always ensure all the regular costs are included in the accounts in the month when they occur or should occur.
At the bottom of the report will be the Net Profit or Loss - the income less cost of sales and overheads. Usually the report will show the figures for the month or quarter and the year to date so you can get a sense of how the business is doing overall.
If you are VAT registered all the figures in this report will be net of VAT. The profit (or loss) you are left with is your earnings within the period if you are a sole trader and is taxable. If you are a limited company the net profit is subject to Corporation Tax at the end of the year.
If your business has bank or hire purchase loans the capital repayments of these are not a trading cost and therefore do not reduce your profit. The drawings or dividends you take from your business are not a trading cost either and do not reduce your profit. It is therefore important to know how much profit your business is making and how much you as a director or sole trader are taking from the business to ensure there are sufficient funds remaining to cover ongoing costs, unexpected costs and growth.
Every business has different needs and different key numbers which are important to them. It is therefore important for us, as bookkeepers, to understand what numbers are important to the business owner and then see how we can best produce this .
Profit and loss reports are straightforward to produce from accounts software but, of course, are only relevant and accurate once the accounts are complete for a period. If there are still bank transactions to reconcile or sales or purchase invoices to be added producing a Profit & Loss report will be a waste of time as it will not show a true reflection of how the business has done.
For some of our clients we produce bespoke Profit & Loss reports which show the figures in a more meaningful way for their business. We might produce Department Profit & Loss reports, or include a provision for Corporation Tax, or produce a budget variance report. We also produce cash flow reports based on projected income and spending.
When we take on a new client and provide them with their first management reports they are hooked! If they have never had them before they can immediately see the benefit of knowing how their business is doing on a regular basis. The information enables them to manage cash flow and make informed decisions when planning business growth or particular purchases and helps them to plan for VAT and tax bills too.
If you think your business would benefit from organised and up to date accounts as well as useful management reports give us a call and we can talk through what would help you.