How to produce Management Accounts
If you have never been involved in producing or using management accounts before, you may find the whole process a bit daunting.
The following Questions and Answers are designed to de-mystify the process for you and leave you confident to make the right decision about what (if any) management accounts you need to run your business effectively and profitably.
1. Where do I start?
The answer always is your “Chart of Accounts”. When you record all your individual transactions – in other words, your purchases and sales, every one of them is coded so that the software knows where to record it. Your Chart of Accounts is set up to record;
- Your sales, in as many different categories as you have. If all you do is sell widgets then it’s very easy: just one category is all you need.
- Your cost of making these sales. Often this is no more than what you paid to buy the widget you have just sold. It gets a bit more complicated when you spend time (wage costs) to make something before selling it.
- Your overheads. These are all the other costs you incur NOT directly related to what you sell. The most common overheads are: telephone, insurance, travel expenses, advertising and premises costs.
- The assets you buy (computer, office furniture, vehicle). These are not overheads or part of the cost of making sales. These assets help you make more sales because they are still there every time you make a sale – they are not “consumed” as part of the selling process.
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2. How often do you produce management accounts?
That’s the hard bit over – it’s downhill all the way from now on. The answer can be weekly, monthly or quarterly and most of the time, the answer is monthly. The accounting software is set up that way which is a good clue. “Weekly” means you won’t have time to do anything else and “quarterly” means you are always behind the game and your reactions to events will often be too late.
3. What about double-entry book-keeping?
It helps if you know your debits from your credits, mostly because you will better understand what you are doing (and able to interpret the results) and you won’t have to pay external accountants to do the “hard bit” for you. By the “hard bit” I mean converting all your monthly transactions into a set of coherent management accounts. Without understanding the basics of double-entry book-keeping, producing monthly accounts on your own is achievable but you will sometimes get it wrong.
4. Figures / Charts / Graphs – which?
Entirely up to you. Some people are happy with rows and columns of figures, others love the visual feel of charts or graphs. Modern accounting software can do either – it’s your choice, but normally, if you like charts and graphs, you have to produce the figures first.
5. What/who are your management accounts for?
Starting with “who”, the answer is often just yourself if you are running the business. If others are involved, get their input when you are designing the layout of your Chart of Accounts and how that converts into your management accounts.
What are they for? Most of the time, the answer is all about understanding what has happened in the immediate past with a view to improving that performance by making changes to how the business is being run. For example, the management accounts will show you how many widgets you need to sell at a given price or margin to at least cover your overheads. Only after that point are you making any profit for yourself – this is known as the “Break-even point”.
6. Can you run the business without management accounts?
You might just about ‘get by’ keeping simple charts plotting sales, stock and cash week by week – or you might not. So the short answer is “no”. To misquote slightly: “How do you know where you are going if you don’t know where you have just been?”
Understanding how to produce management accounts, and their skillful use and application, will make your business stronger and more resilient to challenges – if you need help in this area of financial management then seek an expert to support your ambitions.
Straight talking business advice on how to produce management accounts from Yorkshire Powerhouse
Now you’ve read our article on how to produce management accounts – have you any more questions?
Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:
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