Management accounts usually consist of financial reports indicating profit and loss statements but are not limited to them.
Management account of a business might consist of the following key components:
- Executive summary
- Balance sheet
- Key performance indicators
- Cash flow statement
- Profit and loss statement
The executive summary consists of the important key points of management accounts. This section highlights gross profit or loss, turnover ratio, and overall growth rate of a business.
It depicts the financial situation of a firm or a business. The balance sheet includes assets, liabilities, and owner shares for the given time.
Key performance indicator
Key performance indicators determine how effectively a company is achieving its set objectives. It also helps in evaluating the overall performance of the business. The key performance indicator includes:
Revenue per client (RPC): this is a measure of total revenue generated per each client. It is an important determinant in evaluating which clients are contributing to how much turnover.
Client retention rate: refers to customers who continue to buy your product in a given time frame. Positive client retention means your business is progressing in the right direction.
Profit Margin: it is the relation between cost and the revenue you generate. If the ratio of cost is more than the revenue generated that means a negative profit margin. You will need large finances to run a business with a negative profit margin and vice versa.
Customer satisfaction: it is the simplest yet crucial KPI in determining the progress of a business. If your customers are satisfied with your products or services, it indicates your business is on the right track and vice versa.
Cash flow statements
Cash flow determines net cash coming into and out of a business. A positive cash flow indicates a company’s liquid assets are increasing. The increase in liquid assets enables a company to reinvest, pay debts, pay expenses, and ability to face future financial challenges.
Profit loss statement
This statement evaluates the difference between your expenses and incomes. It is a critical indicator in determining the overall performance of a business. Business management shall have extensive knowledge of its profit-loss statements and its changing trends with respect to time.
Management accounts for SMEs
As mentioned earlier management accounts keep owners and managers updated on business progress. Management accounts are similar to that of statutory accounts, where statutory account provides yearly progress of a business, management accounts provide regular (monthly or quarterly) updates on business status. It is usually considered management accounts are only applicable to big businesses but thats not the case. According to a statistical report, among 5.7 million businesses in the UK, 98% have 19 or fewer employees. However, a little fraction of these businesses has management accounts. These statistics are very shocking given the importance of these accounts.
Management accounts are not just spreadsheets full of numbers that you have to analyze while running a business. But it plays an important role in determining overall progress and in making future predictions. However, managing accounts require to be updated on a regular basis which can be difficult especially if you are busy running a business. At Lyel Accountants, we are happy to help you set a management accounts system that provides you with a regular update on your business progress with realistic predictions.
If you would like more information regarding this, get in touch with us on 0113 436 0002 or use the form below.