Regular Management Accounts are an absolute necessity in making business decisions based on recent performance. Once in-use you, the business owner, will love them.
Management Accounts are financial reports used by the business owner and management for decision making and running the company based on recent performance. They are produced every quarter, month, or week. They contain key performance indicators, giving insight into the company financial health.
One Profit and Loss for the entire company is not enough. You need to report Profit by Product, Service, Customer type, or location. Otherwise, you will not know where you are making money! For example, a hotel may track profit by location. They could also go into what types of rooms are the most profitable.
Management Accounts are financial reports used by the business owner and management for decision making and running the company based on recent performance. They are produced every quarter, month, or week. They contain Key Performance Indicators and give insight into the financial health of a company.
Reporting Management Accounts regularly means you and your team can see the effect of business decisions soon after making them. The goal is to improve future decision making.
Or, simply give your bookkeeper the complete how-to guide to create outstanding Management Accounts for you, at no extra cost to what you are already paying them.
We give you examples, templates, and step-by-step instructions. Use this article to review your existing reporting.
If you need specialist help from a certified accountant then please get in touch with us for a free consultation!
7 things you should include in Management Accounts
The management team should decide what to include in the Management Accounts because they can also contain non-financial data. Don’t limit yourself only to financials, put in anything you feel is relevant to the business. After you bespoke your own Management Accounts template, you then mould your Accounting Systems around it.
Management Accounts are not one-size-fits-all. For example, a large restaurant does not need the same report as a food manufacturer. As well as Industry, your size, strategy/plan, and targets will also change what you need to see each month.
1. An Executive Summary
This presents a business snapshot. Someone who understands the business should structure the snapshot. The business owner will always read it, so it needs to include commercial info. Don’t take too long to get to the point, most of the report’s value will only be in a few pieces of information. We cover finding valuable data in the “preparing management accounts” section below.
The summary page should include the P&L & Cashflow’s headline figures and include the most critical KPIs. Also include a contents page and make the summary page easy to navigate to further detail if required.
2. The standard: Profit and Loss and Balance Sheet
To understand what a balance sheet is, and what it can help you with please see Money Week’s video).
3. A Cash Flow Statement
Cash Flow Statements are more important than a Profit and Loss, include it in your report. Cash is King. Cashflow shows the bare bones of the company, it connects the P&L and bank balance for the owner to understand. If you tend to wonder where your profit has gone because you can’t see it in the bank, then this will be useful to you. Cash is so important that CFOs are jokingly called Cash Flow Officers!
The above is what most people include in their reports, but to get the most value out of your Management Accounting include the following:
4. Budgets & Targets
How did we perform against what we planned? Will we make the profit we expected? If something went wrong, what was it, and how can we solve it? Where do we need to improve? Let’s say you have set a monthly target of – Sales £250k/month, Cost of Sales £100k/month, and all other costs of £50k/month.
Subcontractor costs have exceeded your budget of 5% of Sales. You manage to lower this cost and maintain quality.
Without monitoring your Management Accounting, you would have been paying thousands each month. Budgeting brings a harsh reality and forces decisions to improve profit now. If you only add one thing extra to your Management Accounts, make sure you include Budgeting.
5. A consideration of your current Strategy and Plan
The information you need to see each month will depend on your Strategy and where you are as a business. A company with quality issues may need to include Quality KPIs, e.g., Six Sigma Level or Customer Retention Rate. If your current strategy is growth, you’ll need more data on Sales.
Some Sales KPIs include Customer Online Engagement Level and Cost per lead. The Net Promoter Score, and Customer Satisfaction Index are also useful.
Structure the Management Accounts around what is most useful to the team right now. Decide on the one area you need to focus on: Staff, Operations, Sales, Marketing, or Systems.
6. Industry specific KPIs
How do you know if you have tailored the Management Accounts enough? A good test is, if you can apply the report to any other industry, then you have more work to do. Every Industry has completely different needs and KPIs. Some service businesses, like Accountants, have no variable costs and only sell time. For them, good KPIs are staff time, Billable Hours %, and Idle time.
They would need to focus on tracking staff costs. If this firm also has significant growth ambitions, it would also focus on Sales. Restaurants should track materials and labour, because they can destroy Net profit. They have very low margins already, and materials & labour fluctuate drastically.
Multiple Profit and Loss Accounts
Include a separate Profit & Loss Accounts per Product, service, customer type, or location. You know the business better than anyone. The report should replicate how YOU view the business.
Mapping the Managements Accounts to how YOU view the business is by far the most crucial bit, and so enjoyable.
Please see the next section on how to prepare Management Accounts for more on this. It is the key to unlocking their value.
Why do you absolutely need Management Accounts?
You are forever thinking about your business. Management Accounts are the numbers behind your thoughts. Sharing thoughts with the team means better planning. The power lies in discussing where you did well or went wrong. “In God we trust, everyone else must bring data!”
Here are some reasons why you need Management Accounts:
- Measuring company performance. Did the entire company make money last month?
- Judging Investments. If we buy this equipment or marketing, how much money will we have made this year? Are the numbers realistic if we buy this equipment or marketing?
- Tax Planning. How much tax are we likely to pay (6 months before the year-end)? How can we better spend this money on the business rather than on the taxman?
- Product/service performance. How much money did we make on this product or service range last month? What Products or Services must we push for in the next six months?
- Profit centre performance. How much money did we make in this location? What Profit Centres must we push for in the next six months? What sites must we improve in the next six months?
- Judging Customer performance. How much money did we make on this customer group? Which types of Customers must we push for in the next six months?
- Bankers and Investors. Borrowing is becoming difficult without up to date Management Accounts. The accessibility of cloud accounting means there is no longer an excuse to lenders.
- Budgeting & Targets. Using a P&L is like trying to drive a car using the rear-view mirror. Working off historic data is ok, but budgeting allows you to plan ahead and see where you went off track. In order words, Management Accounts can track expected vs actual performance. You should have a yearly Profit target, broken down into the sales and cost targets needed to achieve it. The Management Accounts can then highlight where you strayed from target each month. Having a weekly budget allows you to solve issues even before the month-end.
- Professional vs Hobby. Golf professionals take measurements for every aspect of their game. They have targets for each measurement and track against them. Professionals practice doing 10,000 swings and want to know BY HOW MUCH each one was off target. People like this want to know where they are improving each week. It is this attention to detail that separates the 1% most profitable in every Industry.
This Clutch survey shows the stats on businesses doing Budgeting (i.e. target setting):
Their survey then shows how over a third of businesses didn’t stick to their budget. They recommend that using Monthly rather than Quarterly budgets will help solve this issue. If you are going over budget, then something is either wrong in your planning or in your operations. The sooner you can understand the problem, the better.
You cannot improve the performance of your company with only one Net Profit figure! You need Profit by Product, Service, Customer type, or location. Otherwise, you will not know WHERE you are making or losing money!
Measure performance so you can improve it.
How to prepare Management Accounts in 9 simple steps
In this section, we are going to tell you exactly how to structure your Management Accounts and how to prepare them. If you have an existing Bookkeeper, they can do this. You do not need an Accountant! You will not have to pay any extra money for them to do this; it is almost entirely part of their current job role.
1. The Most Important Part – The Structure
If you do this one thing, you will have incredible Management Accounts
You need to express to your Bookkeeper how YOU see your business. They can then report your Management Accounts in this way.
Answering these questions will give you a map of your business to give the bookkeeper. Do NOT look at any of your existing financial reports:
- Do you have groups or a range of your products/services that you want to monitor? E.g., a Restaurant wanting to track profit on Food, Non-alcoholic beverages, and Alcohol.
- Do you have groups of customers you want to track separately? (For example, in your mind you may have four different customer types).
- Do you have different locations you want to monitor? E.g., a Nursery business that wants to track profit per Nursery location.
- Is there anything else you would like to monitor?
Why this is so important? You now know what Profit Centres you want to track. Give the answers to your bookkeeper and get them to structure your reporting in this way. Instead of seeing 1 Gross Profit Figure and 1 Net Profit figure, you will now see them per area you want to track. Imagine seeing an accurate Net Profit per product-range for the last week! You can see which areas you are making the most money on and act accordingly. You can then make plans and forecasts based on this information.
2. Collect the tracking area information for each invoice
You will also need a system for telling the bookkeeper which tracking area each invoice is for e.g. let’s say you want to track product type (Food, Drink, and Alcohol. A simple way of doing this is to have a knowledgeable staff member write the information at the top of the invoice.
Other methods are to have a drop-down menu from Receipt Bank (Receipt Bank is an invoice collection tool). A good bookkeeper will start to learn which tracking area each invoice is for. To do this they will have to get to know your business or have a lot of experience in your Industry.
Get the staff member to select tracking area upon submitting the invoice to Receipt Bank (see in the picture below). If any have not been selected, get the bookkeeper to call and ask the designated person what the invoice is for. Alternatively use the manual method above.
You do not need to pay for Xero Projects to use Receipt Bank Projects.
3. Set up the data collection system for each area you want to track
From now on, the bookkeeper will need to label each Sale or Expense by the area you are tracking. In Xero accounting software this is easy. See Tracking. Let’s use the same tracking area used above, product type (Food, Drink, and Alcohol). Create a tracking category called Product type and enter your three product types.
When entering an invoice (sales or purchases), select the tracking area this invoice is for (see picture below).
Another, though more messy way, is to get your bookkeeper to use separate nominal codes. Let’s say you have 3 locations you want to track (Nursery location 1, 2, and 3). Create nominal codes for rent, staff, electricity, and all other costs per location. The risk here is that you will have a considerable number of nominal codes, making it more prone to errors. Your bookkeeper will know how to do this.
The way you see your business is pure Gold. No one knows it like you and your management team. You need to tell the bookkeeper how you see your business so they can report it like it is in your head. Then the reports will have three times the value! You will be able to make decisions on them.
4. Get the bookkeeper to enter final journals
Make sure your bookkeeper enters the salary, depreciation, stock, and loan journals. They should how to enter all these themselves. 95% of the time, this is all you need to do to get the data you need for quality Management Accounts.
5. Set up the report in a Management Accounts reporting program
Use a reporting tool like Futrli or Spotlight Reporting. Link it to your Xero/QuickBooks/Sage account, then create a report in it containing P&L, Balance Sheet, and Cash flow statements.
6. Add your P&Ls per tracking area
If you don’t know what this then stop and re-read step one above, it is the most important part! To learn how to create multiple reports in Xero for these profit areas, see the next section on “How to create Profit by Segment in Xero Reports for the first time”.
7. KPIs (Key Performance Indicators)
Decide what KPIs to track as a business then simply add these to your Futrli report. Bear in mind that you may not need fancy KPIs, simple financial KPIs may be enough.
If you want more detailed KPIs, do the following. Decide what KPIs you want to use, any KPI library website will guide you. It will depend on your Industry and what you want to track now. For example, trying to Grow, improve quality, or make Operations more efficient. Assign staff to collect extra info (e.g., Idle staff Time, Customer Retention rate). Then pay your bookkeeper to calculate the KPIs manually and report them back to you or use a reporting tool like Futrli, reporting software that updates KPIs by linking to your other data sources.
Creating KPIs in Futrli is easy. Their name for them is “Formulas”. From the menu click “Formulas”, this takes you to their Formula Library. Simply select from one of their pre-selected KPIs e.g. “Operating Profit Margin Ratio” or “Return on Assets” Ratio. You can also build as many of your own custom-made KPIs. Futrli also lets you use non-financial data, so if you want a KPI like “Sales by Sales Rep as a % of total Sales” this is easy.
Simply get a staff member to record the info in an excel sheet and import this data into the non-financial data section of Futrli. If you’re doing it for the first time, build the KPI in the KPI builder. You can now add this KPI to any of your reports.
8. Set Budgets and track against them
These can also be built in Futrli and added to your report. Decide the company’s yearly profit target and break down the Sales and Costs needed to get there. Remember to factor in variable costs (Costs of Sale) and Fixed costs (all other costs). Make sure the bookkeeper tracks against these budgeted figures.
Remember, you have tracking by area setup, meaning you can also create Futrli Budgets by product, service, customer type or location (depending on what you have set up).
Futrli is perfect for setting up Budgets. Below is a Budget in Futrli (sorry it’s not clearest of screen shots). The pink, left column, is what the Team planned. The variance column highlights issues.
9. Set Automatic Alerts
In Futrli go to the Alerts section and set rules for things you want to be alerted to. For example, if Staff costs go above 20% of Sales, then alert me, or if the bank balance decreases by more than 3%, alert me. You can create automatic alerts quite easily in Futrli as well.
Futrli automatically highlights where issues have arisen (see picture below). Setting up the alerts is simple in Futrli.
You should continuously alter your budget as the months go on. This is how to do that in Futrli.
How to avoid the two biggest problems when implementing useful Management Accounts
If you understand the value of Net Profit per customer/product type and location, read this. There are only two problems you may face implementing it.
1. Staff not buying-in to the new information collection system
To collect Sales and Cost info for each tracking area you will need a strict procedure. See the section above on Preparing Management Accounts. You will need to involve at least one of your staff (small company) or a few staff (larger company). If you do not have full buy-in, then you will not have complete information. If the information is not fully accurate then you may as well estimate profit per area!
2. Why it will cost you A LOT of money on double entering data if you do not have an exceptional Bookkeeper
Though the bookkeeper can do the Management Accounts, they need to be quality. Usually, people pay Accountants to create the report, simply to check the bookkeeper’s work. Most business owners doing this will not have thought about it properly. It is impossible to check someone’s work without checking it ALL. You are paying for the Accountant to do almost all the work again!
The bookkeeper must do the job correctly—rubbish in rubbish out. Your entire Management Accounts rests on the quality of your bookkeeping. It is the foundation. Make sure you have a qualified bookkeeper, who is an excellent communicator & business-like. You need to be 100% confident that they don’t make consistent errors. They also need to be able to understand the reporting you want from a business perspective.
How to create a Profit by Segment Report in Xero for the first time
This section will explain creating the report in Xero for the first time. You need the data categorised correctly first though so see the how-to section above if you need to.
Nominal Codes. One way is to get your bookkeeper to categorise the cost & sale areas by separate Nominal Codes. Tell them this, and they will know what to do. Then, follow this procedure. In the Profit and Loss Template, click “Edit Layout”. Then use the “Schedule” feature at the top to create sections for each of the Areas you want to track (e.g., customer type).
Then click “add accounts” in the section you’ve created. Select the nominal codes for that area into the segment, don’t worry this will not remove it from the main Profit and Loss. When they finish, save the report. This will give you one P&L per area and one main P&L for the entire business.
Method 2 (Recommended, as it’s cleaner)
Tracking. Your bookkeeper should know how to use Tracking. If they don’t, then this may be the sign of other problems with your bookkeeper. (Remember you need to be confident in the information they give you. Otherwise, you’ll have to double pay an Accountant to do it.) Get them to watch Xero’s tracking video and use it to create the report.
Get them to repeat this process for the Cash Flow Statement and the Balance Sheet.
How to know if you need Monthly or Weekly Management Accounts?
When deciding on the frequency of your Management Accounts, consider the industry and your goals. Follow the below guide:
If you have many transactions and need to keep costs down, report weekly. A Restaurant is an excellent example of benefiting from weekly Management Accounts & Budgeting.
Average Net Profit Margins for large Restaurants are around 6%-8%. A 5% improvement could mean £60k in your pocket. In these environments, it is those who continuously track measurements that succeed. The benefit is in detail. Simply put, you will be doing what your competitors are not willing to do, and you’ll see the results. Typically, large Restaurants save at least 4% in Net Profit Margin from weekly budgets! For more information on this see the “Why do you need Management Accounts?” section above on Budgeting and the Professional vs Hobby Analogy.
Monthly or Quarterly
Industries with mostly fixed costs (e.g. Nurseries or Hotels) will not need weekly reports. Decide whether you want them monthly or quarterly. We recommend monthly. You will outperform competitors if you base decisions on more up to date information.
Management accounts >examples
As a rule of thumb, the best example of Management Accounts are the financial reports you produce at the end of the year. However, you should include more information to help you run the company and make better business decisions. As an example, let’s see a small hotel business that has four hotels in different locations across the country.
Headline Profit per location
They want to know the profit per location. See picture below. (These figures are for an example only). The first is the Headline Profit per location. This report will be on the executive summary. It gives the Management Team an overview of the performance.
Management will also see this graph on the Summary page in case they prefer visuals.
Each location’s profit
If they want to break it down a little, they can see a headline for each location’s profit
Then (not shown here), they can see a breakdown of the different types of income and costs per location.
They will also have this information in a Cash Flow format if cash needs closely monitoring.
The Summary Page also has an alert section, showing anything Management wanted highlighting. For example, if the bank account balance has decreased by more than 2% in the period. Or if staff costs have increased by more than 5% over total sales. To learn about creating automatic alerts see the prepare Management Accounts section above.
Here is an example of setting a Budget and then tracking against that budget. You can then look at the sales and expenses breakdown to dig further into any issues.
Create little snapshots of essential information. Examples are Contribution Margin Percentage or Days Sales Outstanding. You can find a list of KPIs by Industry and application on any KPI Library. For more examples and guidance of KPIs, see the section above on “7 things you should include in Management Accounts”.
To see a step by step guide on how to set every element of this up, go to the “How to prepare Management Accounts in 9 simple steps” section above. You can even give the guide to your bookkeeper to setup the entire process on their own if you want to.
At Archimedia Accounts, our team of experienced management accountants can provide all the information you need to plan a promising future for your business.
- It is not enough to have only One Profit & Loss; you need Profit by Product/Service type, Customer type, or location. Otherwise, you will not honestly know where you are making money! To learn how to code invoices by area see the preparing Management Accounts section above. Give the section to your bookkeeper and they should be able to do it. The section will also explain how to quickly get your bookkeeper to build the P&L and Cash Flow in Xero. It draws on what they already know but shows how to create separate sections for each tracking area.
- You don’t need an Accountant to get Management Accounts. They are not a Statutory requirement. You only need a Bookkeeper, but they need to be a good one, or you’ll have to pay an Accountant to do the work again.
- Include a Cash Flow and critical KPIs in your Management Accounts.
- A budget is arguably the most important part of Management Accounts. It allows you to improve performance right now. Budgeting brings your business planning into the present. Use Budgets to move step-by-step towards your goals.
If you have any pressing questions or want to enquire about our Management Accounts Service, please get in touch.