Management accounts are internal financial reports prepared during the year to help directors understand how their business is performing.
Annual accounts report the company's results and financial position for its accounting year and support statutory filings. Management accounts give directors shorter-period reports to review during the year. Our comparison of management accounts and annual accounts explains how the two work together.
What do management accounts include?
A typical set of management accounts may include:
- -Profit and loss statement
- -Balance sheet
- -Cashflow overview
- -Corporation tax estimate
- -Key performance indicators
These reports give directors a current view of profitability, margins and liabilities throughout the year.
How are they different from year-end accounts?
Both use the company's accounting records to report what has happened. Annual accounts cover the accounting year and follow the applicable reporting requirements. Management accounts cover shorter periods and can add budgets, forecasts and commentary to explain the results.
You can use both reports when reviewing the business. The main differences are the period covered, the level of detail and when you receive them:
| Dimension | Year-End Accounts | Management Accounts |
|---|---|---|
| Audience | Shareholders, directors, lenders and statutory recipients | Directors and managers; lenders or investors where agreed |
| Format | Applicable accounting standards and company reporting requirements | Reports agreed around the business and its decisions |
| Frequency | Once per year | At agreed intervals |
| Timing | After year-end, in time for the applicable filing deadlines | On agreed preparation and review dates |
| Purpose | Annual reporting, business review and statutory filings | Reviewing performance and planning during the year |
| Typical content | Profit and loss, balance sheet and other required statements and notes | Actual results against budget, balance sheet, cashflow, tax estimates, performance measures and commentary |
Reading a management report
This illustrative consulting company has a 31 March year-end. Its April to September report compares the first six months of actual results with the budget for the same period. These are example figures, not a client report.
| Line | April-September actual | April-September budget | Variance |
|---|---|---|---|
| Revenue | £285,000 | £250,000 | +£35,000 |
| Direct costs | (£92,000) | (£75,000) | (£17,000) |
| Gross profit | £193,000 (67.7%) | £175,000 (70.0%) | -2.3 percentage points |
| Salaries | (£88,000) | (£90,000) | +£2,000 |
| Other overheads | (£38,000) | (£35,000) | (£3,000) |
| Operating profit | £67,000 | £50,000 | +£17,000 |
Operating profit is £17,000 above budget. The report helps explain how that happened and what to investigate:
- Sales are £35,000 above budget, but direct costs are £17,000 higher. Gross profit has increased by £18,000 while the gross margin has fallen from 70.0% to 67.7%. Reviewing prices, supplier costs and the mix of work would help explain the change.
- Salaries are £2,000 below budget and other overheads are £3,000 above. Together, these costs reduce the £18,000 improvement in gross profit to a £17,000 improvement in operating profit.
- Tax and dividends need further checks. A Corporation Tax estimate needs a full-year forecast and the relevant tax adjustments. A dividend decision needs up-to-date distributable profits after tax, as well as enough cash to pay the company's bills.
Why profit and cash differ
The same company's cash report explains the movement between the beginning of April and the end of September:
| Line | Amount |
|---|---|
| Operating profit, April-September | £67,000 |
| Increase in trade debtors, including VAT | (£48,000) |
| Increase in trade creditors, including VAT | £12,000 |
| Decrease in net VAT liability | (£18,000) |
| Dividends drawn | (£24,000) |
| Net cash movement | (£11,000) |
Cash has fallen by £11,000 despite £67,000 of operating profit. The £48,000 increase in unpaid customer invoices is the largest movement. The directors would review which invoices are due, when customers expect to pay and the company's upcoming payments before deciding what to do.
This simplified reconciliation assumes no depreciation, stock movements, asset purchases, borrowing, Corporation Tax payments or other cash movements. Trade balances include VAT, so the VAT adjustment is the change in the net liability, not the total VAT paid. The report shows a change in cash; the opening bank balance is needed to calculate closing cash.
Our management accounts service combines agreed reports with a review of the figures and the decisions you are considering.
Are management accounts mandatory?
A monthly or quarterly management pack is not generally a statutory filing requirement for an ordinary private limited company. Companies must still keep adequate accounting records and meet their annual reporting obligations.
A lender, investor or other agreement may require regular reports. The contents and delivery dates should reflect those requirements as well as the directors' needs.
Who benefits most?
Management accounts are particularly useful for:
- -Limited companies employing staff
- -Directors planning dividend extraction
- -Businesses with fluctuating cashflow
- -Companies preparing for growth or investment
Our guide to management accounts for small companies explains how to choose the reporting detail and frequency around your decisions.