The Difference Between Financial And Management Accounts

The Difference Between Financial And Management Accounts

Managing your own business is as much about managing finances as it is about doing whatever your business does.  The maze of financial documentation can be daunting even when you do have an accountant.  There are annual returns to file, corporate tax returns to complete PAYE, VAT… and the list goes on.

Depending on how you want to run your business you could also add management accounts. Management accounts are not a legal requirement.  They fall more into the category of preferred information – they will help to keep a figure on the pulse of the business.

Do I need management accounts?

Financial accounts are a legal requirement that describes how the business has performed over the last financial year.  The information in these accounts is normally  historic and used by external bodies that have an interest in knowing about your business, such as Her Majesty’s Revenue & Customs (HMRC).

Financial Accounts

Financial accounts are typically made up of three elements:

Profit & Loss Accounts provide a summary of business transactions for the last 12 months, that is it shows whether the business made a profit or loss.  A Balance Sheet gives a snapshot of the business’s financial health on a particular date. A Cash Flow Analysis examines whether or not there is adequate incoming cash to cover the business’s outgoings.

Management Accounts

Management accounts are a little different.  They are a set of figures looking at different areas of your business.  They are just for you and your management team.  Many businesses produce them on either a monthly or quarterly basis.  If your business consists of more than one or two people, you will need them to keep track of what’s actually happening and who is spending what and when. Management accounts should contain data about:

  • Sales: The performance over the last month or quarter, product pricing and credit control.
  • Purchasing: How much your business has spent in the last period, how much stock it holds and what your debts are.
  • Fixed assets: What your business owns, for example in equipment or vehicles

By no means should your management accounts be another historical document;  they should be focused on looking forward and used to provide useful analysis for the future.

For example, you can use your management accounts to look at your sales revenue, when it is due in, and which of your customers are likely to pay late. This is a very good way to accurately predict what your cash flow will be like in a few months’ time.  Hence giving plenty of warning about whether or not you may need to arrange additional finance. You can also spot worrying trends, such as stock levels increasing against flat sales  Or that your sales in a particular product are slightly down several quarters in a row. This kind of advanced warning can help you create new products in time to replace reduced demand.

Management reports can be a useful compass used to navigate your business towards success.

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