Annual Accounts are very familiar to business people. Every year statutory reports which comply to specific accounting standards must be filed with HMRC and Companies House. But what about Management Accounts? There is no legal obligation to generate them. Why then, do so many organisations depend on Management Accounts in running their operations and could you be benefitting from them too?
Here we consider the differences between Annual and Management Accounts, and how Management Accounts can help. If this causes you to question whether your business should also be getting Management Accounts, then please get in touch to find out about your options.
Management Accounting versus Annual Accounts
Both types of financial reports reveal the financial status of the business. However, Management Accounts differ in ways which make it extremely useful for running a successful business, charity or social enterprise.
- Annual Accounts are produced at the end of the year, to reflect what has happened that year. Management Accounts are produced more frequently during the year often every month or quarter so that you can see an emerging picture and plan for the future.
- The primary audience for Annual Accounts – HMRC and Companies House – is external, whereas Management Accounts are used internally as a decision tool by the Board, business owners, Trustees or management.
- Annual Accounts must comply to strict accounting standards so that the format for every business is the same, making the results of different businesses comparable. Management Accounts, however, can be tailored to each organisation. For example, you can assess turnover versus the targets your organisation works to, and answer “what if?” questions such as “if orders double what happens to our costs”.
Questions which Management Accounts can answer
Management Accounts can answer management questions such as:
- How is our performance versus target?
- Which customers are most profitable?
- Are our costs as expected?
- What’s the impact of seasonal customer demand on profits?
- Is our cashflow sufficient given the fast growth in orders?
- What are the sales per head and overheads per person?
- How much can we pay in dividends through the year in expectation of year end profits?
More benefits of Management Accounts
Because Management Accounts track what is happening, as it’s happened, instead of just at year end, it’s a more pro-active way to assess the organisation’s financial health.
Regular reports are especially helpful during periods of change, whether that’s rapid growth or an economic squeeze. They can enable you to ensure your organisation is robust enough to cope with the financial demands that change brings. For example, can your running costs be scaled back with a temporary decline in orders or conversely, can your current cashflow support the costs involved with an increase in demand.
Whilst Management Accounts are not a legal requirement, many charities use them to provide clear accountability. In some instances, regular Management Accounts are a condition when accepting charitable endowments or large donations. The reports provide Trustees, with a good understanding of how the charity is performing and highlight any issues which should be addressed as part of good governance.
Because Management Accounts provide greater transparency about how the business is performing, they can be used to attract investors, apply for grants and funding, and enable a greater valuation of the business as part of an exit strategy.
Find out whether your organisation could benefit from regular Management Accounts. Talk to us about your organisation’s situation and HB Accountants can suggest options for providing you with actionable Management Accounts, or if we feel that Management Accounts are not appropriate right now, we’ll explain why and what you can do instead.