The whole purpose of any business is to create a profit. That profit is seen in the management of accounts along with potential risks to that profitability.
It’s important to be familiar with these management accounts as they are used to make decisions of how to grow the business by allocating scare resource most wisely during the year. It will show you the cash position of the business, where the money is going each month and critical areas of the business and their performance.
In the Annual Report, there are six key sections:
- The Directors Report
- The Auditors Report
- Profit and Loss Account
- Balance Sheet
- Cash Flow Statement
- Notes to the Accounts
The Management Accounts help with the preparation of the Annual Report. The Management Accounts are there to help with:
- Management Planning
- Cost Control
- Performance Management
The core of these accounts are the Profit and Loss Accounts, Balance Sheet and Cash Flow Statement. Notes to the accounts are important too.
7 benefits of reviewing management accounts weekly:
- The bank balance may look good today, however the Management Accounts can help identify possible future problems caused by poor trading conditions, looming severe cash flow short falls can be predicted, poor margins identified, low sales figures and rising costs.
- An analysis of sales can be seen by product or service to help identify trends.
- Analysis of costs, where the money is going is important to ensure costs do not escalate.
- Tax planning. By knowing how much the company is making and when, taxes can be minimised, salaries and dividends paid appropriately.
- Comparing the P&L to the previous year will identify possible overspend, underspend and variances in revenues.
- Different departments and locations can be compared to identify trends and performance variations.
- Completing the Management Accounts in a timely way, periodically, reduces the chance of errors later, long after the transactions have completed.