How to Read Management Accounts: a Guide for New Managers

Are you in your first Management role in an organisation but you have no idea how to read management accounts? Or maybe you don’t know what they are exactly? Well, you’ve stumbled upon the article just for you: let me tell you all about what management accounts are, how to read them, and why, as a manager, you should take a keen interest in reviewing and understanding them. 

As a Finance Manager myself, I have spent a lot of time explaining management accounts to staff who were newly hired or promoted into managerial positions, who never had to engage with management accounts before. Understanding the information presented in them is not only extremely important if you wish to progress in your career (no matter what role you’re after), but it will teach you so much about how the organisation works, and how managers and senior staff make decisions about its future.

In this article, we’ll delve into the world of management accounts, exploring what they are, what they look like, and most importantly, how to read them. By the end, you’ll gain the knowledge necessary to leverage management accounts to make informed decisions and drive positive change within your organization.

What are Management Accounts?

Management accounts provide an internal snapshot of an organization’s financial performance, enabling managers to monitor, analyse, and plan their operations effectively. Unlike statutory accounts, which are prepared for external stakeholders and focus on historical data, management accounts are prepared regularly (usually monthly) and provide up-to-date information to guide managerial decision-making.

While statutory accounts adhere to specific accounting standards and are required by law, management accounts are more flexible and can be tailored to suit the unique needs of an organisation. They offer valuable insights into an organisation’s financial health and help managers identify trends, track performance against targets, and make informed strategic decisions about what comes next.

What do Management Accounts Look Like?

Management accounts typically comprise a set of financial reports that provide an overview of an organization’s financial position and performance during a specific period. The exact format and structure of management accounts may vary between organizations, but they generally consist of the following key components:

1. Income Statement (Profit and Loss Statement): this report presents the organisation’s revenue, expenses, and resulting profit or loss over a given period. It offers insights into the revenue streams, cost drivers, and overall financial performance of the organization.
2. Balance Sheet: the balance sheet provides a snapshot of the organization’s assets (what the company owns), liabilities (what the company owes), and equity (investment capital and/or reserves) at a specific point in time. It helps managers assess the organization’s financial stability and liquidity by detailing its resources, debts, and net worth.
3. Cash Flow Report: this report tracks the organization’s cash inflows and outflows during a period, highlighting the sources and uses of cash. It is crucial for understanding the organization’s ability to meet its financial obligations and manage its cash flow effectively.
4. Key Performance Indicators (KPIs): management accounts often include KPIs tailored to the organization’s specific goals and objectives. KPIs provide measurable data on critical areas such as fundraising performance, program costs, and efficiency metrics. These indicators enable managers to assess progress and identify areas that require attention or improvement. For example: a bar may have KPIs to measure the cost of their drink stock compared to the revenue generated by selling drinks. If the cost of buying the stock exceeds a certain ratio, the managers might investigate whether this is due to mad stock management, waste, or increased supplier costs.

What is Included in Management Accounts?

In addition to the financial reports mentioned above, management accounts may include supplementary information to provide a comprehensive overview of the organisation’s performance. These additional components can vary depending on the organisation’s specific requirements, but they often include:

1. Budget Variance Analysis: this analysis compares the actual financial results against the budgeted figures, highlighting any deviations. It helps managers identify areas where the organisation is performing better or worse than expected, enabling them to take corrective actions if necessary.

Usually, there are two variances presented in management accounts: the Year To Date figures (YTD) and the full year forecast. The YTD figures show the actual to budget variance from the beginning of the financial year to the month in question. The full year forecast includes a reforecast of the figures to the year end.

2. Narrative Commentary: management accounts may include written commentary that explains the financial results, the main headlines for managers to take into consideration, significant transactions, and any exceptional circumstances that impact the numbers. This commentary provides context and helps managers interpret the data effectively.

How to Read Management Accounts

Reading management accounts effectively involves more than just understanding the individual components. Here are some essential steps to help you make sense of the information provided:

1. Familiarise Yourself with the Format: spend some time studying the structure and layout of the management accounts. Identify the different sections and understand how they interrelate.
2. Review the Income Statement: start by examining the income statement to gain insights into the organisation’s revenue sources, expenditure patterns, and overall profitability. Pay attention to key figures such as total revenue, cost of goods sold, operating expenses, and net profit. Look for trends and changes compared to previous periods to identify areas of improvement or concern.
3. Analyse the Balance Sheet: move on to the balance sheet, which provides a snapshot of the organisation’s financial position. Assess the levels of assets, liabilities, and equity/reserves. Look for signs of financial stability, such as a healthy cash balance and manageable debt levels. Analyse changes in key accounts over time to understand the organisation’s financial health and liquidity.
4. Understand the Cash Flow Statement: examine the cash flow statement to gain insights into the organisation’s cash inflows and outflows. Focus on the operating activities section to understand the cash generated from core operations. Assess the investing and financing activities to identify significant investments, loans, or other financial transactions. Understanding the organisation’s cash flow is crucial for assessing its ability to meet financial obligations and fund future initiatives.
5. Pay Attention to Key Performance Indicators: review the KPIs included in the management accounts. These indicators are specific to your organisation’s goals and objectives and can provide valuable insights into its performance. Identify any trends or significant deviations from targets. For example, if fundraising performance is below target, it may warrant a closer look at fundraising strategies and initiatives.
6. Seek Context through Narrative Commentary: read any narrative commentary accompanying the financial reports. This commentary can provide valuable context and explanations for the numbers presented in the management accounts. It may highlight significant transactions, exceptional circumstances, or changes in the operating environment that impact the financial results. Understanding the narrative behind the numbers can help you interpret the data more effectively and make informed decisions.
7. Compare Actuals with Budget: perform a budget variance analysis by comparing the actual financial results with the budgeted figures. Identify areas where there are significant variances and investigate the reasons behind them. Positive variances may indicate areas of strength, while negative variances may require further attention and action.
8. Identify Key Trends and Patterns: look for recurring trends and patterns across multiple periods. Identify areas where the organisation consistently performs well or struggles. This analysis can help you understand the underlying factors driving financial performance and make data-driven decisions to improve outcomes.
9. Seek Clarification and Ask Questions: if certain aspects of the management accounts are unclear or you require further information, don’t hesitate to reach out to your finance team or colleagues with expertise in financial matters. Seeking clarification and asking questions can help you gain a deeper understanding of the information presented in the accounts.

Useful Questions to Ask Yourself When Examining Management Accounts

When delving into the realm of management accounts as a new manager, it’s essential to ask yourself relevant questions to extract meaningful insights and make informed decisions. Here are some useful questions to consider when examining management accounts:

1. How is our revenue performing?
   • Are there any significant changes or trends in our revenue streams?
   • Are we meeting our fundraising targets or generating income as projected?
   • Are there any potential risks or opportunities related to our revenue sources?
   • Are our targets still attainable, or do they need to be reforecast?
2. What are our major expenses and cost drivers?
   • Are there any significant fluctuations in our operating expenses?
   • Are there areas where costs have increased unexpectedly or significantly?
   • Are there any cost-saving opportunities or areas for efficiency improvement?
   • Are cost of sales (aka direct costs) increasing or decreasing in line with increasing or decreasing income?
3. How is our profitability?
   • What is our net profit margin, and how does it compare to budget?
   • Are there any specific factors affecting our profitability positively or negatively?
   • Are there areas where we can enhance our profitability?
4. Are we effectively managing our cash flow?
   • Is our cash flow statement indicating positive cash flow from operations?
   • Are there any liquidity concerns or signs of cash flow constraints?
   • Are we effectively managing our working capital, including accounts receivable and payable (aka sales and purchase invoices that are due)?
5. Are we meeting our budgeted targets?
   • How do our actual results compare to the budgeted figures?
   • Are there significant variances that require investigation and explanation?
   • What actions can we take to address any budgetary shortfalls or deviations?
6. What are our key performance indicators (KPIs) telling us?
   • Are our KPIs aligned with our strategic objectives and mission?
   • Are there any KPIs showing consistent improvement or decline?
   • Do we need to redefine or adjust our KPIs based on changing circumstances?
7. Are there any external factors impacting our financial performance?
   • Are there regulatory changes, economic conditions, or industry trends affecting our operations?
   • How can we adapt our financial strategies to mitigate risks and leverage opportunities?
8. What additional information or analysis do I need?
   • Are there any gaps in the management accounts that require further investigation?
   • Do I need to seek additional data or insights to fully understand the financial position and performance of the organisation?

By asking these pertinent questions and critically analysing the management accounts, you can gain a deeper understanding of your organisation’s financial landscape. This process will empower you to make informed decisions, identify areas for improvement, and drive the organisation toward its goals while ensuring financial sustainability and accountability.

Conclusion

As a new manager, understanding how to read and interpret management accounts is crucial for making informed decisions and driving positive change. By familiarising yourself with the components of management accounts, analysing financial reports, and paying attention to key performance indicators, you can gain valuable insights into your organisation’s financial health and performance. Remember to seek context through narrative commentary and compare actuals with budget to identify areas of concern or improvement. With this knowledge, you’ll be equipped to navigate the financial aspects of your role with confidence and contribute to the success of your organisation.

This post was all about how to read management accounts and what is included in management accounts