Management accounting reports are often overlooked by smaller businesses, but they provide vital insights into a business’s performance

Every business owner knows the importance of basic financial reports: they give an insight into financial health through various means, such as tracking profit and loss and monitoring cash flow.

While many business owners understand this and have probably engaged an accountant to create financial records for the company, they may not have dived deeper into the numbers by running a Management Report, which is essentially FREE if you are using an online accounting system like Xero.

What are management accounting reports?

One simple explanation of a financial management report, or management accounting report as it is often known, is that it gives specific insight into your operations and allows you to judge your business performance going in the next quarter or even next year. Most importantly, it can reveal trends, especially if the report compares previous quarters or the performance year to date compared to last year.

What information do these reports contain for small businesses?

A typical management accounting report will provide plenty of useful financial information for small businesses, including:

  • an overview of your cash flow
  • how much money has moved in and out of your business during the period you’re looking at
  • profit/loss for the same period
  • information on your assets, liabilities, and the equity of your business
  • detailed data about your receivables and payables for the given timeframe

To help you gain a better understanding of this, we’ve included a brief outline of what a typical management accounting report will look like. There are many platforms you can use to create these reports, but some of the clearest come from Xero, an excellent cloud-based accounting software service and the following example is taken from one of its reports.

Executive Summary

At the top of your report you will see an executive summary of your chosen time period, showing your profitability, income, and general performance, along with a simple overview of your financial information. While some small businesses run quarterly reports, monthly ones can be more beneficial to your business.

Cash Summary

In this section, you will see a summary of the cash flow in your business, how much money is leaving and how much is coming in.

Profit and Loss Report

This is always a big part of a management accounting report as it provides details for how much money you have gained or lost during a period.

Balance Sheet

This provides you with a financial statement detailing all your assets, liabilities and capital at the current point of generating the report.

Aged Receivables

In this mini report you will see any sales invoices or receivables that are yet to be paid to your company during this period.

Aged Payables

Likewise, this report shows you how much money you currently owe, along with how long this has been the case.

Other Discretionary Information

Most cloud-based accounting software, such as Xero, allows you to incorporate a wide range of information in addition to that highlighted here.

How can management accounting information be used effectively?

Seeing all the information you receive from a management accounting report is one thing, but understanding how to use it effectively is another matter entirely.

The executive summary is essentially a condensed version of the entire report. You can use the information here to make a note of the main points and issues your business has come across during the period.

The information in your cash summary will go a long way in helping to manage your expenses, as the data show where and how your money is being spent. It also shows you how much money is coming into your business and from what sources, allowing certain patterns to be discerned if you know how to interpret the data. For example, your small business could spend a lot of money making a certain product, but the cash summary shows that the same product isn’t bringing in much revenue. By comparing your cash summaries from previous reports, it allows you to see if this is a one-off occurrence or regular.

The profit/loss report is another important tool for tracking the progression of your business because it provides you with your net profit/loss for a given period, which you can compare to previous and future reports. Ideally, you should see a pretty constant net profit for your business, preferably increasing over time. However, depending on the nature of your business, this may fluctuate, particularly for businesses affected by seasonal trends. Some months may show significant losses, simply because product stock has yet to be purchased. If this is the case, it would be reflected in the cash summary, plus the data also highlight the importance of having healthy cash flow to support this type of business profile.

The information in your balance sheet gives you see an overview of the financial position of your business. The data can give valuable insight into where your liabilities lie and how to get the most out of your assets. Of course, it can also be used as the base of a business valuation and most importantly, if your business is solvent.

Why should small businesses produce management reports?

With any business, it’s vital to know the mechanics and workings inside out. Understanding the overall health of your business can mean the difference between success and failure, and allow you to make timely changes if required. In summary, the reports can enable you to:

Lower expenses

By producing these reports, you place a magnifying glass on your operating costs and expenses. In doing so, you can see which things cost too much without gaining you enough. Therefore, you can adjust your expenses appropriately.

Modify your budget

Having the ability to analyse your cash flow enables you to rethink your budget. You can move more money to certain areas, reduce spending for others, and make sure that the cash flow in your company is consistently good throughout.

Improve profitability

A management accounting report can directly influence future profits, provided you can spot trends in the data. You can focus on parts of your company that are proven money earners, resulting in rising profits and keeping you clear of any potential losses.

Plan for the future

The information provided in these reports allows you to make more informed business decisions when going forward. For example, when hiring a new employee, you can use the financial data to weigh the true cost of hiring them against the benefit they provide, letting you judge whether the new employee will be an asset or a liability.

In short, management accounting reports can benefit small businesses in a multitude of ways. They can be used to help steer your company towards success, and avoid continuously making mistakes that cost you a lot of money.

To find out how you can best use the information, it’s a good idea to have a chat with London-based chartered accountant TaxAgility. With offices across London, including Cavendish Square in Central London, Putney and Richmond, TaxAgility has a dedicated team of accountants on hand to help you digest and make sense of the numbers. We want your business to thrive just as much as you do.

TaxAgility is an accounting firm based in Richmond, London, where we put the needs of local small businesses first. We want to see you succeed because then we can succeed.

We’re not shy about providing business growth suggestions and helping you figure out the best way to grow your business, so don’t be shy about calling and asking how. Why not give us a call to see how we can help your business and remove the burden of your everyday accounting demands.