Your accounting information can support your business’s growth in a dramatic way. You have to be using it in the right way!
The first step to using your accounting information in the right way is to understand the difference between Management and Financial Accounts.
Management accounts are regular reports that are generated, typically, on a monthly basis. These reports are used by business owners, leaders, directors and managers to operate and manage the business.
In other words, their audience is internal to the business.
Management accounts give business leaders the most up to date information on the business’s finances. They also include other operational information they need to know, such as key performance indicators and metrics.
This information is used initially to help the company set goals and targets. Once set, they’re then used to realise those goals and targets in the future.
A company has a goal to increase sales over a 12 month period. This goal is broken down into a targeted sales amount for each month.
The management accounts measure the actual sales to those targets to ensure the business is on track to reach that goal. If it isn’t, this information is known long before the goal is missed. This allows a new, different, or adjusted strategy to be adopted, to help the goal be achieved.
This is how management accounts help you to grow your business!
Management accounts encourage efficiency and control over the company’s finances and operational and strategic performance. By comparing the company’s performance to planned, budgeted, forecast or market performance:
- Improvements can be made
- Issues can be resolved before they before they become big problems
- Informed decisions can be made
Management accounts look at the information in the moment and the future. They’re drawn up in the way that is most useful to the business. And take into account how it operates and needs to view the financial information in order to best manage the business.
In contrast, financial accounts are the type of accounts people most often think of.
These are the annual accounts that must be drawn up to meet statutory obligations, such as Companies House filing. These are the accounts that support the creation and submission of tax returns also.
Financial accounts are backwards-looking and are drawn up to be compliant. They adhere to accounting standards and strict rules regarding how, what, why, where and when.
Financial accounts are used mostly by parties external to the business management team, such as shareholders, regulatory bodies and funding providers.
Now, while financial accounts are very important for these external stakeholders, and must be created, they don’t need to be filed for 9 months after the end of the financial year. This means the data they are comprised of is always out of date, and nothing can be done to effect change in something that is done and dusted.
So, in summary:
- Important for external stakeholders
- Backwards looking
- Must comply to accounting standards and regulations
- Important for internal stakeholders
- Current and forwards looking
- Represent information in the best way for the business to manage its operations and performance
- Should be used to effect change, reach goals and improve business performance