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Management accounts

Understanding accounts series

Introduction

Management accounts was originally an American term but has now been around for many years in the UK. Its name belies the purpose of the accounts. They are prepared for the use by the managers in a business to help them manage.

Managing by numbers

Management accounts are more flexibly designed than full accounts.Firstly, full accounts, like those you might send to HMRC, usually deal with the whole organisation and will often draw a comparison with the previous year. It is not impossible for management accounts to be prepared to cover the whole organisation but they would usually draw comparison with a budget perhaps as well as with last year. Management accounts, however, can be constructed to provide information about smaller business units. A smaller business unit could be a single business division or geographical location.Some examples might be:

Machine shoporGlasgow
AdministrationEdinburgh
StoresAyr

So the purpose in making these subdivisions is to give the division manager information that helps him or her decide on how to get things back on target or to measure the effects of actions taken in the last time period.Remember too that full accounts are most often produced annually. Managers couldn’t manage even their own small part of an overall business if they had to wait a year or more before they found out if they were on target or not!It sounds as if management accounts are for big businesses only, but they’re not. Many small businesses need to know more frequently about how things are doing as the year goes on.So management accounts express two different perspectives – frequency (monthly, quarterly, half yearly) and business focus (divisions, products, locations). Check out the engineering company case study to see how this can work. By doing monthly accounts, business owners get to see how things are going during the year and still have time to do something about their results for the year before it ends. It allows them time to plan their investment spend to make maximum use of tax allowances, organise making their tax bill lower and keeping things on track generally. It means too that the business owner can discuss options, ideas and possibilities with his or her professional business adviser.

Budgets

Budgets are an integral part of management accounts. After all, without some idea of your expected results, how will you know if you are on target or not and whether you need to take any action or not? To find out more about budgets and how they can work for your business, check out our budgeting jargon-buster.

Before making any decisions concerning the accounts of your business or enterprise, you should consult a professionally qualified accountant.Return to Advice page.

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