The correct way to prepare management accounts

I have prepared a gazillion Management Packs during my working career. It still amazes me when I look at how some other management packs have been prepared.

Balance sheet + income statement + a comparison against budget with variances.

Sounds okay. Why then would this amaze me? Because it does not give the full story. Not even close.

Reason being that these management packs are only able to tell me where the business has been. But not where the business was heading.

Management accounts are normally presented at a monthly management meeting where management have to make decisions about the business. Impacting the future of the business. You see, the past is the past, and there is absolutely nothing you can do about it. Ever been in those management meetings that just go on and on and on. Discussions, circling the same topic over and over, trying to establish why the office grocery budget was over spent and who is to blame? Pfff – There is no value in crying over spilled milk. Therefore all management decisions does not and should not look to change the past, but looks to change the outcome of a possible future. The past only serves one purpose – to learn from…

Therefore it is vital to have a picture of where the business has been AND where the business is going.

It is at this point where proper budgeting and TARGET setting plays a big role.

If your management accounts shows, that the business has overspent on the electricity budget for the past 6 months, with explanatory notes (“because it was winter months which led to higher consumption”), it has no value. But what does have value is when you present the actuals for the past 6 months PLUS the budget for the next 6 months to determine where the business will most likely end the financial year. It is only when you do this, that your management accounts will begin to have true value. The management team’s decisions are then based on a comparative picture of where the business will most likely end up versus where the management team desires the business to end up.

Thus there is a need for two budgets. The first one is the TARGETS you set for yourself in the beginning of the year. Reaching for the stars type of stuff. The second is a forward looking, ever changing, BUDGET that evolves every single time new information becomes available. It is this second budget that must be used to paint the picture of your “actuals” + “budget for rest of the year” in order to see where you will most likely end up.

Keeping in mind that you then also have to compare this clearer picture against the targets you have set for the business.

This two pronged approach ensures that you have a picture of where you ARE, where you WILL BE and where you WANT TO BE.

All management decisions are now forward looking and focused at bringing these two possible scenarios closer together.

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