Management accounts are a set of financial statements (statement of profit or loss, balance sheet, Cashflow statement) that are prepared throughout the year usually weekly, bi-weekly, monthly, every 3 months, half-yearly or yearly. Although the preparation of management accounts is not a legal requirement, they are the most important tool for decision making as they help to identify the key drivers or KPIs (Key Performance Indicators) of the business.
A key performance indicator sometimes simply called performance indicator helps an organization to measure or evaluate how effectively it is achieving its business objectives in the activity for which it engages thereby enabling the organization to adjust its current project dynamics through sound decision making. An example of a KPI in sales is the actual number of calls made by the sales team given that the number of calls is an important determining factor as to whether a company brings in more money or not.
Importance of Management Accounts
- They help you make informed decisions:
For a business to make sound decisions, it needs to carry out a situation analysis to know where the business is at present. For this, the company’s management would need management accounts as these accounts provide up to date information.
- They put you in control:
By having current data and knowledge about your business, you are in control. You can spot trends and changes as they happen and adjust effectively. There is no room for nasty surprises.
- Track progress:
If for example, you had planned to make R1million for your business during the first quarter, preparing monthly management accounts to enable you to track the progress of this objective and inform you as to whether you are on track as well as the challenges you are facing and how to adjust to this challenges through informed decisions.
- Apply for Financing:
Usually, most creditors would ask for the latest management accounts from the sixth month after the latest financial year-end as a supporting document when applying for finance. However, potential investors and property management companies can ask for any period after the latest financial statements. Therefore, having the latest set of management accounts is a vote of confidence for the business as it indicates the level of control which management has over operations.
- Cashflow Management:
The saying that cash is king is one of those sayings that would live forever. By having up to date management accounts, businesses are able to identify whether they have sufficient cash to cover expenses for the next 2 or 6 months of operations, how much the company expects to receive over the corresponding periods to justify the cash outflows or expenses, and whether the company is in need of additional finance to cover expected expense.
Do you need help with identifying the Key Performance Indicators of your business or with preparing a management account? Contact an accountant today.
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