The difference between Management Accounts and Year-End Accounts

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Accounting, Bookkeeping

While many business owners understand the year-end accounts’ role in fulfilling tax obligations, management accounts are still a bit of a mystery. Unlike their annual counterparts, management accounts can be helpful throughout the year.

Unlike year-end accounts, which are aggregated and focused on tax compliance, management accounts offer a more detailed and frequent breakdown of your organisation’s financial health.

In this article, we’ve spoken to our internal finance experts to help you understand the differences and all the benefits of management accounts.

What Are Year-End Accounts?

A year-end account, as the name suggests, is a financial report summarising a business's financial activity over a fiscal year.

These reports are typically prepared for tax purposes and are required by law. They provide an overview of a business's revenue, expenses, assets and liabilities and show how they have changed over the course of the year.

The problem is, though, as you’ll find when speaking to Conor Stanley, Outmin’s Fractional CFO extraordinaire, a business owner can’t get any practical insights from their year-end accounts.

Year-end accounts are just numbers in aggregate. Yes, they give you a general picture of a business's financial health. Still, they don't provide detailed insights into specific revenue sources, expenses, or other metrics you need to constantly tweak to succeed.

This makes it hard to identify areas for improvement or make informed decisions about the direction of the business. In other words, year-end accounts alone are not sufficient for managing a business effectively.

And that's where management accounts come in!

What Are Management Accounts?

A management account is a financial report that provides detailed insights into a business's financial performance. Unlike year-end accounts, management accounts are prepared on a monthly or quarterly basis, giving you a more frequent and up-to-date view of your financial position.

Management accounts are more focused on providing actionable data about how the business is running. For example, they break down revenue by sources, so business owners have a better understanding of where their revenue is coming from and where their money is being spent.

For example, a chain of Thai food restaurants using management accounts would be able to see how much revenue came from in-store purchases versus deliveries, the average order size, which items were more popular, and any other trends to help them determine where to take the business.

They would also see a breakdown of costs like the price of ingredients, cutlery, rent, electricity, etc. – so they know exactly where money is going. This level of detail makes it easier for a business owner to identify areas for improvement or make informed decisions about future moves.

Since the best management accounts are tailored to the industry and the business's specific problems or goals, they can identify the issues, allowing you and your team to drill down and fix them.

Similarly, management accounts will show you where you excel, so you can strengthen that avenue and grow your revenue further.

For example, if the Thai food chain notices they are making a lot of revenue through deliveries, it can assess whether it should hire more delivery drivers to meet demand.

Another benefit of management accounts is that, since they’re prepared every month, they can help you understand how revenue fluctuates and identify seasonal trends.

For instance, the Thai food restaurant might experience peaks during winter when more people are home ordering takeout, but things slow down during the summer.

How Management Accounts Can Help Improve Business Performance

Management accounts are not only helpful for providing a detailed view of a business's financial performance but can also help you make data-driven decisions about improving operations.

By analysing the data in management accounts, you can identify areas where you can reduce costs, increase revenue, or optimise your operations.

For example, our team at Outmin has recently worked with a hospitality group to analyse their management accounts. By breaking down their sales, salaries, and costs, we discovered that their salaries were 40% of revenue, which was unusually high compared to industry standards.

We then evaluated who received the highest salary percentage and found that chefs were getting the highest salaries, even when the restaurants weren't operational.

In this sense, the management account helped us rationalise these costs and determine if they made sense.

In another example, we worked with a software company whose previous accountant only provided year-end accounts, making it challenging to understand how the money flowed in and out of the business.

Once our fractional CFO team correctly structured the management accounts, the business could finally see their lifeblood (revenue) and everything that raised their pressure. At the end of the day, the management team knew enough to focus on the right areas that scaled their business.

Best Practices for Using Management Accounts

According to Outmin’s CFO, here are the best practices he swears by when maximising the effectiveness of your management accounts:

Review your management accounts with your finance team or fractional CFO every month.
Your accountant should provide comments and insights on the numbers – qualitative in addition to quantitative data.
Include non-financial measurements and numbers related to your business (e.g., average order size, total amounts with the number of orders, etc., from our Thai food chain example).
Depending on your business, your management accounts should include references to who owes you money, who you owe money to, and basic cash flow.

Unlock Your Business’s Full Potential with Outmin

Even though year-end accounts are necessary for accounting, you’ll need management accounts to truly understand the health of your business (as a manager or owner).

By breaking down your revenues and costs by sources and categories, management accounts let you identify trends, spot inefficiencies, and make data-driven decisions to optimise your operations and profitability.

At Outmin, we understand that managing finances can be daunting and time-consuming, especially for small and medium-sized businesses. That’s why we provide a range of financial solutions, from dedicated accountants to fractional CFOs, to help businesses like yours thrive.

Our digital-first approach ensures that we deliver accurate, timely financial information and insights to our clients, allowing them to make strategic decisions and future-proof their businesses. Our experts are here to help you every step of the way!

If you want to unlock your business's full potential, contact us today to learn more about Outmin's solutions for business owners like you!

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