05: Understanding management accounts

Financial accounts on their own do not provide owner-managers with the information they need to best manage their business because of difficulties in interpreting the data and in using it to make informed decisions.

While the type of management accounts needed will depend on the size and nature of the business being run, they can be produced to give managers a clearer picture of areas of the company which are considered important – such as sales or the purchasing process – in order that trends can be identified and strategies and plans evaluated, both to improve profitability and to reduce costs.

For example, while a formal profit and loss statement provides a historical record of trading performance, internally-produced management accounts can enable you to calculate profit margins and compare them against those of other companies and with previous trading periods. They can also facilitate comparisons between individual products.

In summary, management accounts enable managers to:

• Identify key trends.
• Compare accounts with original budgets and forecasts.
• Help to better manage resources and control costs.
• Highlight areas of your business that need attention.
• Help the company to prepare its budgets and set financial targets.