What should be included in management accounts?

Management accounts vary in depth depending on the size and complexity of a business. A useful pack normally includes a few core reports that show profit, cash, tax and dividend capacity clearly.

1. Profit and loss with variance analysis

The profit and loss statement shows income, direct costs, overheads and net profit for the period. Comparing actual results with a budget shows where income or spending differs from what you planned. The difference is called a variance. Comparing with earlier periods can also help when a budget is not available.

Illustrative monthly results for a limited company, compared with its budget:

Scroll the table sideways to see the comparison and notes.

Operating profit is £13,500 below budget, or 42.2%. Sales are £3,000 higher, direct costs are £12,000 higher and overheads are £4,500 higher. Those movements explain the full difference. The director needs to investigate both supplier costs and extra overhead spending before deciding whether to change prices or reduce costs.

Depending on the business, useful comparisons include:

• -Sales by client, product or channel, so you can compare different parts of the business
• -Gross profit and gross margin percentage, showing what remains after direct costs
• -Overheads compared with budget, with significant differences explained
• -Results from the start of the financial year alongside the current month

2. Balance sheet

The balance sheet provides a snapshot of the company's financial position, including assets, liabilities and retained earnings.

This report helps directors understand overall stability and available reserves.

3. Cashflow and working capital

A profitable business can still have less cash when customers pay slowly or a tax bill falls due. A cash reconciliation explains the difference between profit and the change in the bank balance. A separate forecast can show expected receipts and payments over an agreed period, such as the next 13 weeks.

This simplified example assumes no stock changes, equipment purchases, borrowing movements or other cash flows. Customer and supplier invoice balances include VAT. The change in VAT owed to HMRC is shown separately from supplier balances:

The company made £18,500 of operating profit and its bank balance fell by £10,700. Unpaid customer invoices rose by £14,000, the VAT liability fell by £19,800 and the company paid £4,000 in dividends. The fall in the VAT liability means payments to HMRC exceeded the net VAT added during the period. Adding back £2,400 of depreciation and allowing for £6,200 more owed to suppliers completes the reconciliation. The director can check overdue customer invoices and plan for the supplier bills still to be paid.

You can also compare how long customers take to pay, how quickly you pay suppliers and how long stock is held. Changes in those timings help explain why more cash may be tied up in the business.

4. Corporation Tax and dividend capacity

A Corporation Tax estimate helps directors plan for the bill. Start with expected accounting profit, adjust it for tax and allow for the accounting period, associated companies and any other rules affecting the rate. Review the estimate when the forecast changes.

For illustration, assume a UK-resident trading company has £180,000 of taxable and augmented profits for a 12-month accounting period, no associated companies and is eligible for Marginal Relief:

• Tax at 25%: £45,000.
• Marginal Relief: (£250,000 less £180,000) multiplied by 3/200, giving £1,050.
• Corporation Tax estimate: £43,950, an effective rate of about 24.4%.
• If £32,300 of cash has been set aside for this bill, a further £11,650 is needed.

Setting cash aside is different from recording a tax expense in the accounts. The report should make clear which figure it shows. HMRC explains the conditions for Marginal Relief and the current rates and standard fraction.

A dividend check considers accumulated profits available for distribution after losses, tax and previous dividends. The bank balance alone does not establish that amount. GOV.UK explains dividends and directors' loans. Ask your accountant to review the available profits and the cash needed for bills before declaring a dividend.

5. Director summary

Numbers alone are not always enough. A short written summary explaining key movements, trends or risks can make the reports easier to use.

Optional additions

Depending on the business, management accounts may also include:

• -Budget vs actual comparisons
• -Forecast projections
• -Key performance indicators, such as gross margin and customer payment times
• -Departmental reporting

How do they differ from annual accounts?

Annual accounts report on a completed financial year. Management accounts can be prepared more often to help you review costs, cash and decisions during the year. Read our comparison of management accounts and annual accounts.

Our management accounts service explains the reports, records and review schedule we agree with you.

Are they the same for every business?

No. A small service company may require simpler reporting than a growing company employing multiple staff or operating across several revenue streams.

As limited company accountants, we adapt reporting depth to suit the stage and needs of each business.