Management accounts: what they are and when an SME actually needs them

For many growing businesses, the problem is not a complete lack of financial information. It is having information that arrives too late, is too difficult to interpret, or does not answer the questions management actually needs to make decisions.

That is where management accounts can become useful.

Annual financial statements are important, but they are primarily prepared around an annual reporting period. A business owner making decisions throughout the year often needs a more current view of what is happening inside the business.

Management accounts are designed for that purpose.

What are management accounts?

Management accounts are internal financial reports prepared to help owners and managers understand how a business is performing.

Unlike annual financial statements, they are not primarily produced to meet an annual reporting requirement. Their purpose is to provide management with timely information that can support decisions.

The exact content should depend on the business and what management needs to understand.

At a basic level, this could include an income statement and balance sheet prepared from up-to-date accounting records. More developed reporting may include cash information, comparisons with previous periods or budgets, relevant operating measures and commentary on areas that require attention.

The point is not to produce more pages. The point is to make the financial information useful.

Bookkeeping and management reporting are not the same thing

Good management reporting starts with reliable accounting records.

Bookkeeping records the financial activity of the business and keeps the accounting system up to date. That is essential.

But accurate bookkeeping does not automatically mean management has useful decision-making information.

A business can have its transactions processed correctly and still struggle to answer questions such as:

• Are margins improving or deteriorating?
• Which costs have changed materially?
• Why does the business appear profitable while cash remains tight?
• How is the current period comparing with previous periods?
• Is there anything in the numbers that management should be investigating?

Management reporting takes the underlying accounting information and presents it in a way that helps answer those kinds of questions.

When do management accounts become useful?

There is no single turnover level or company size at which every business suddenly needs formal management accounts.

The better question is whether the decisions being made in the business have become more sophisticated than the information currently available to support them.

A few situations are particularly common.

1. The bank balance has become the main management report

Cash in the bank matters enormously, but a bank balance does not explain the full performance of a business.

A healthy balance today does not necessarily mean the business is performing well, just as a tight cash position does not automatically mean the business is unprofitable.

If major decisions are being made primarily by checking the bank account, the business may benefit from a clearer view of profitability, costs, working capital and cash movements.

2. Revenue is growing but the owner is less certain about profitability

Growth can make financial performance harder - not easier - to understand.

A business may be selling more while margins weaken, overheads increase or cash becomes more difficult to manage.

As the number of transactions, customers, staff, services or operating activities grows, it can become harder for the owner to understand performance simply by being close to day-to-day operations.

Regular reporting can help separate activity from financial performance.

3. Financial questions are only answered at year-end

Annual financial statements should not be the first time an owner discovers that an important expense increased, margins weakened or a balance-sheet item requires attention.

If management only gets a meaningful financial picture once the financial year has ended, the information may be accurate but too late to help with many decisions.

More regular reporting allows issues to be considered while management can still respond to them.

4. The business has more than one person making decisions

As businesses grow, financial information often needs to move beyond the owner.

Managers, business partners or other decision-makers may need a consistent view of performance.

That makes informal explanations and spreadsheet extracts increasingly difficult to rely on.

A regular management pack can create a common financial picture from which decisions can be discussed.

5. The numbers exist, but nobody is explaining what matters

More financial information is not automatically better financial information.

A 20-page report that nobody reads is less valuable than a focused report that highlights the numbers management actually needs to understand.

Useful management reporting should help identify what changed, what appears unusual and which areas may deserve attention.

The objective should be clarity - not report volume.

What should management accounts include?

There is no universal template that is appropriate for every SME.

At minimum, the reporting needs to reflect the questions management is trying to answer.

Depending on the business, useful reporting could include the income statement, balance sheet, cash information, comparisons with previous periods, budget-versus-actual information and selected business-specific measures.

For one company, customer collections may deserve particular attention. For another, gross margin may matter more. For another, payroll or overhead growth may be the issue.

Good management reporting should therefore be proportionate to the business.

An owner-managed SME does not necessarily need the reporting pack of a listed company. It needs enough information to understand performance and make better-informed decisions without creating unnecessary administration.

Monthly or quarterly?

Not every business needs monthly management accounts.

The appropriate frequency depends on how quickly the business changes, how often management makes material decisions and how much value more frequent reporting would provide.

A relatively stable business may find quarterly reporting sufficient.

A business growing quickly, facing cash constraints or requiring closer performance monitoring may benefit from monthly reporting.

The right frequency is the one that makes the information useful enough to justify the time and cost of producing it.

Good reporting depends on good underlying records

There is an important practical limitation.

Management accounts cannot compensate for poor accounting records.

If bookkeeping is months behind, transactions are incomplete or balances have not been properly maintained, sophisticated reporting may create an impression of precision without reliable underlying information.

In those circumstances, the priority may first be to bring the accounting records up to date and understand their condition.

Only then does it make sense to build more useful reporting on top of them.

The goal is better visibility, not more finance administration

For many SMEs, management reporting becomes valuable at the point where the owner no longer wants to rely on intuition, a bank balance and year-end information to understand the financial side of the business.

That does not mean every company needs a complex finance function.

It means the financial information should evolve as the decisions inside the business evolve.

The best management accounts are not the ones with the most schedules, charts or KPIs.

They are the ones that help management understand:

• What happened?
• Why does it matter?
• What needs attention?
• What should we do next?

General-information disclaimer: This article provides general information only and is not accounting, tax, investment or other professional advice for a specific business.