What Are Management Accounts for Hong Kong SMEs

What Are Management Accounts

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A Brief Overview Of Management Accounts

Do you own a business or manage one and feel that you’d like it to expand? Is this an area where you even have management accounts for this purpose?

Management accounts are a useful tool for keeping an eye on your business’s financial position and success over a period.

Here we explore topics such as management accounts, why they are important, what exactly they are used for, and how you can use them most effectively.

Management accounting includes the preparation of financial reports with the aim that managers can base their decisions on the information they provide about the performance of the business. Such reports give the figures of various financial metrics and present a total economic picture of the company.

Management accounts are usually prepared on a monthly or quarterly basis. They are used to guide operationally and strategically both on a daily basis and long-term.

The preparation of management reports is like the preparation of year-end accounts, but they are less formal and much more customized to meet the needs of a specific user.

What Makes Management Accounts Useful?

Management accounts can be helpful in the following ways : 

Growing the business

Through continuous and reliable updates, you will be able to spot trends and risks before they turn into barriers. You will be able to move the actions in the right direction and make the business grow. 

Better cash flow management

Proper account management should identify the cash inflows and outflows. It is very critical for you as a business owner to know exactly the amount of cash you have, the amount of cash you expect to come in, and the amount you need to meet your outflows.

It will avoid adding unnecessary pressure to your cash flow. On the other hand, if you have extra money, you will have a chance of getting various discounts which will be offered in bulk purchases.

Tax planning

Management accounts are frequently used by tax specialists and accountants to forecast the tax liability of a company.

On the other hand, it can be used to verify whether tax authorities have calculated the correct tax liability.

Improve the audit process

Typically, auditing is done once per year, while management accounts are generated more frequently.

It will not only spread the load evenly around the year but also identify the rise of any issues as they come up instead of all at once during an audit.

Promptly resolving issues as they arise throughout the year usually results in lower expenses and faster outcomes than addressing all problems all at once. 

Present information to attract investors or lenders

To make sure management accounts are updated regularly a business owner has a level of control and awareness of your business. This provides investors and lenders with trust in you and your business.

In addition, you’ll already be prepared for approaching financiers when you’ve already got management accounts established.

What Will Be Included In These Reports?

Mostly, management accounts include cash flow statements, profit, and loss, balance sheets, an executive summary, KPIs accounts payables, and receivables reports. 

Cash flow statement

A cash flow statement is a tool which is used to follow the movement of funds within your business for a given period and normally on a month-to-month basis.

It reports the cash received or paid for which the period is shorter, the changes involve in cash reserves, and the closing bank balance.

Accessing cash flow statements from your management accounts gives you the understanding of the cash flow dynamics and at the same time better management of your business finances. This helps you to determine where the revenue originates, how it is allocated and to quickly spot any discrepancy if a need to maintain a financial equilibrium arises.

Profit and loss (P&L)

The profit and loss report is one of the most vital elements of the business analysis process as it reflects the company’s net profit for the previous month or the reporting period.

With the contrast of net income and business expenses, you would get your business profit which shows you the health of your business in a brief way.

Cash flow statement is the main difference from the profit and loss statement as the latter only shows the amount of money remaining after all expenses have been settled, unlike the former which shows only the in-and-out-flow of money.

Balance sheet

A balance sheet is a basic financial statement that lists a company’s financials at a particular point in time in a detailed manner. It provides a current depiction of the company’s assets, liabilities, and equities, demonstrating essential information about its financial situation and strength.

Assets refer to any property, either tangible or intangible, that the company owns or controls including cash, inventory, real estate, equipment, investments or accounts receivable. The liabilities of the company consist of all of the obligation or debt including loans, accounts payable, accrued expense and deferred revenue. Equities, known also as shareholders’ equity and net worth, are the net value of the company’s assets after subtracting liabilities from them.

Through the distinction between asset and liabilities, the balance sheet provides the basis for management and the shareholders to evaluate the company’s solvency, liquidity, and overall financial strength. In the case of a healthy balance sheet, you find a big number of assets in comparison with liabilities, and this indicates that the company has enough resources to pay for its obligations as well as to invest in the growth of the company.

A review of the balance sheet will give you a direct look at these factors, so you can determine if the business can generate profits from its assets and how much debt the business has. It provides the basis for them to understand the company’s financial framework, assess its progress over time, and spot possible issues or developments that can either contribute to or impede the company’s growth.

Executive summary

The executive summary offers a compressed overview of the pertinent elements of a business operation, for example, profit margins, turnover ratio and costs. It can include the operations of different business segments to help in comparing and if there is an underperforming or successful segment then there can be identification. Through this comparison we are then able to identify which parts of the business are performing well and which are in need of improvement or change.

Key Performance Indicators (KPIs)

Key Performance Indicators (KPI) are a set of clearly defined metrics used to measure the degree of success to which business targets are achieved within a specified period of time.

KPIs could serve as key tools to determine how your business is performing if they are combined with other reports to measure if the business is achieving its short, medium, and long-term targets.

 They come to a clear picture of various facets of performance allowing you to evaluate, figure out what to improve and make the right decisions for the business to succeed.

Accounts payable and receivable

Accounts payable are the short-term credit granted to the business by its suppliers, while accounts receivable are the short-term credit granted to the business by its customers.

Maintaining your accounts payable ensures that you know how and to whom to send payments first and how you will meet the future payments.

Reports which deal with accounts receivable prove to be very important when you have regular orders. It gives you a monthly income graph on it. Moreover, it will indicate the number of days an invoice has been outstanding and you can decide whether the late paying customer should be contacted or not.

When Should You Use Management Accounts?

As a manager or the owner of the company, management accounts enable you to : 

  • Greater understanding of the business 
  • Keep financial records accurate and up-to-date 
  • Make well-informed decisions on day-to-day operations and long-term plans 

Along with internal parties, external parties also utilise the management accounts. This for instance could form the basis of a tax auditor’s or accountant’s discussion about management accounts during an audit or estimating the possible profits tax liability.

How FastLane Group Can Help?

The use of management accounts monthly (or even quarterly) can help you as a business owner enjoy many benefits. This is to help you know your business and how to grow and develop it more.

Nevertheless, it requires time and effort to generate management accounting reports, review them for errors, and analyze the information in them. It can put considerable stress on your company’s financial and human resources.

Outsourcing management accounts enables you to stay focused on your own business and delegate the financial information, which is provided at high standards to your staff.

You can count on our experts at FastLane for all the accounting tasks that you need: from bookkeeping for small businesses to complex auditing and management reporting functions.

Contact us if you have any inquiries about our services. We will be glad to cover all questions you may have for your industry and will do our best to be part of your journey in the growth of your business.