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.