Often, it feels like there is not enough time in the day to do everything that needs to be done. The last thing you or anyone else would want to do is to immerse themselves in financial statements or projections. That’s why you have the services of a bookkeeper or, better still, an accountant. 

But you would be wrong. As a business owner, you need to be on top of the business’s finances. You need to know not just how it is currently performing but also how it is projected to do in the months ahead. Not having this sort of information at your fingertips is like driving without your car headlamps – you can’t see where you are going or what you might bump into. Remember too, it’s not just you that will be interested in how the business is performing. Customers, suppliers, your bank or the Revenue could all seek financial information from you at some point.

Essentially, you should prioritise having up-to-date financial information about your business available. This way, as opportunities or challenges arise, you are able to deal with these properly.

Financial accounts vs management accounts

There are two distinct types of accounts. The first set, called financial accounts (sometimes called statutory accounts), are required by law to be produced by limited companies each year, in a standard format, signed off by a registered auditor and filed with the Companies Registration Office (CRO). The financial accounts comprise of a profit and loss account, a balance sheet, and a directors’ and auditors’ report. The format for these financial accounts is often followed by sole traders, partnerships and other entities as well.

These financial accounts relate to the business in the previous year or trading period. While useful in giving information about the business in the past, these accounts do not always give a good guide to current business performance or the trading outlook. It might be a year or more since the last financial accounts were prepared, and business performance could really have changed materially in the meantime. This is where management accounts come in.

Management accounts are produced by a business to help with the day-to-day running of the business. They do not have to follow a standard format, nor do they need to be audited or filed with the CRO. Instead, you decide what type of financial information gets produced, how often (usually monthly) as well as what sort of charts, projections and variance or other analyses are included.

The information sources used in management accounts and financial accounts is often the same, just that the basis of preparation, verification and conventions used are different.

General format of management accounts

While management accounts do not have to follow a set format, you would normally expect to see certain core items included, with other items covered in greater or lesser depth or not at all, depending on the type of business and your specific information needs.

Cover sheet

Cover sheet, stating the name of the business, the period covered by the accounts, a disclaimer relating to confidentiality, etc. 

A management summary

A management summary, covering one or two pages at most, pulling together:

  • Bullet point text on the main items of note, both positive and negative, happening during the period e.g. tender submitted, order won, key staff changes
  • Key financial metrics. These could include*

o Sales
o Margin
o Costs
o Operating profit
o Cash at bank
o Capital expenditure during the period
o Aged debtor analysis
o Creditor analysis
o Staff numbers

* Remember, you choose what to include here. Too much information is costly to produce and will probably not be reviewed. Too little, and the information will miss something important

Profit and loss account 

Write down your key P&L headings on the centre of the page. It’s often a tip to compare performance against previous periods, as well as the financial plan for the year, so you could consider the following:

  • On the left side of the page, you could include the actuals against forecast for the period completed, comparing this to the same period last year, if relevant.
  • On the right side of the page, show the Year to Date cumulative figures (actual) against forecast for the period, and show the full year forecast. You should review the forecasts every few months, so that you have an up-to-date picture of how the business is performing.

Cashflow projections

Cashflow projections, for the next period ahead, setting out expected cash in and out of the business. See the ThinkBusiness.ie Guide to Cashflow for reference.

Performance vs budget

In start-up situations, or indeed when a business is executing an ambitious plan, it is useful to consider actual business performance, as measured by the profit and loss account, versus the business budget for the period. Doing this will help keep your business on track and give an early warning that an unrealistic budget target will not be achieved.

Balance Sheet

Periodically, you may want to prepare a summary balance sheet setting out the usual headings: fixed assets, split out by major asset class; current assets, split between  stock, debtors, cash and prepayments; current liabilities, broken out by creditors, taxes and other liabilities; and sources of finance, such as debt, net assets, and shareholder funds.

5 Action Points

1

Enlist the services of a good accountant. Listen to their advice. Define the sort of financial information that you need and how often you need it.

2

Be critical in defining your information needs. The information may be “nice to have” but it may be difficult or expensive to produce, or worse still, is never reviewed. There are many excellent financial software packages available, so find one that works for you (and is recommended by your accountant).

3

Minimise duplication in the preparation and presentation of information. If you have a Board of Directors, for example, you should be happy to send them the management accounts used in the business, rather than creating a separate report in different format. 

4

Invest your time in understanding key financials and what they signify. Over time, you will develop a “feel” for the business and the relative importance of various financial items. 

5

Be prepared to adjust your business plans, on the basis of the management account information that you are receiving. There is no use waiting until the end of the year to confirm that the business is facing difficulties when you could take action, on the basis of the account information.