How to prepare monthly management accounts (the basics)

Template management accounts

This post shares simple guidelines to helps those running small businesses, charities and social enterprises to master the basics of management accounts. As a social enterprise, we are committed to transparency and do everything we can to share resources like this with the wider community.

This post isn’t about bookkeeping and it’s not about becoming an accountant. It’s about understanding the crucial parts of your finances and giving you the tools you need to make good strategic decisions. This post won’t help you prepare the end of year accounts but it will demystify the central concepts in management accounting and help you run your organisation more effectively. 

If you understand your organisation's finances you are much more likely to make good decisions that see it grow. You should prepare management accounts to evaluate the health of your organisation and review them monthly.

Download the template Excel spreadsheet

1. The balance sheet

Don’t worry too much about this. Your balance sheet is a picture of the company’s assets at any single point in time. It describes what stuff (computers, buildings, cash) you own on a particular day and what debts you have. Small organisations can largely leave this to their accountant except for one thing: cash! If you are going to keep an eye on ONE thing you should keep an eye on cash flow.

So you can often boil down your balance sheet understanding to this: How much cash do we have today?

2 Accrual accounting

Fundamental to understanding management accounts is the concept of ‘accrual accounting’. This is the difference between when a liability is created and when cash exchanges hands. Liabilities ‘accrue’ until they are paid, hence the phrase accrual accounting.

In the case of a company or social enterprise, an example of this is the difference between when you send an invoice and when you get paid for it. 

In the case of a charity, an example of this is the difference between when someone gives you a gift-aided donation and when HMRC actually send you the gift aid amount.

Within the management accounts, the cash flow statement looks at when cash will move in and out of your bank account and the income and expenditure statement looks at when liabilities are taken on or new work is invoiced. 

3. Cashflow statement

Now you understand accrual accounting and you know that your balance sheet shows you how much cash you currently have in the bank. But knowing about cash in the bank isn’t anywhere near as useful as knowing how long this cash will last and how it’s working for you to build the organisation. That is where the cash flow statement comes in. 

You don’t want too little cash but you also don’t want large piles of money sitting around doing nothing! This is a huge wasted opportunity and will lead to stagnation. 

The central point of your management accounts should be your cash flow statement. If you run out of cash your organisation will die. Your management accounts should plot a picture of what you expect to happen over the coming months. It should be sense-checked regularly against your bank balance and it should be set out to flag any cash flow issues before they become an emergency.

4. Income and expenditure statement

The income and expenditure statement is also sometimes called the ‘profit and loss statement’ or ‘P&L’. It explains, typically on a monthly basis, what money is coming into and out of the organisation. 

As mentioned above, the income and expenditure statement deals with liabilities. This means that there is a danger of which you should be aware: you could have an apparently healthy income and expenditure statement but still run out of money. If you spend the money you have invoiced or spend the gift aid portion of donations before HMRC has sent it you will run out of money. 

Creating the income and expenditure statement is not a management accounting task; it is basic booking. For this, you should use one of the great online accounting applications (e.g. Xero, Quickbooks, Clearbooks). When combined with a document scanning system like Datamolino can almost entirely automate your monthly booking tasks and kick out an accurate income and expenditure statement each month. 

Where management accounting comes in is that it’s not enough to only look back. You must also:

  • Analyse the health of your income and expenditure statement
  • Project future income and expenditure
  • Cross-reference both past and future income and expenditure with your cash flow statement. 

This is where the budget comes in!

5. Budget

You may well have no clue what is really going to happen next year but it’s an important discipline to sit down and paint a picture of the next year in figures. It will force you to imagine a potential next year of business and it will inform key decisions about marketing investment, recruitment, capital investment, etc.

If you are newly setup then the best approach to budgeting is to set out two scenarios - one depicting the future you’d like and one depicting the worst case scenario.

Your actuals may quickly break away from your budget but don’t worry. You are building healthy habits and it all adds to your understanding of your business.

6. The monthly management accounts document

The final ingredient to your management accounts should be monthly reports. This is where, on a month-by-month basis, you pull together the other sections of your management accounts into a simple dashboard which shows your last month’s performance in the wider context of the business.

Along with all the individual elements we’ve already described this document should do the following:

Compare income and expenditure Compare actual income and expenditure with your budget projections so you can continually improve and refine your budget. 
Integrate budget and cash flow Integrate your budget with your cash flow statement so you understand upcoming cash issues. To do this you’ll need to make some assumptions about when invoices and other funding sources will actually hit your bank account. 
Check your financial health Review key metrics of health that line up with your organisation’s strategic priorities. For example, you may be wanting to increase the proportion of your income that comes from recurring sources like subscriptions, memberships or regular donations. This is easily tracked through a formula on the front sheet of your management accounts.

 

Free management accounts example template

Organisations vary dramatically and one template is unlikely to work for everyone. For example, charities have the added complexity of having to keep an eye on restricted giving. But it can be helpful to see an example as you seek to craft something appropriate for your organisation. For this reason, we’ve shared a simplified framework that can form a starting point for a small company or social enterprise and could easily be adapted for use as a small charity accounts template. 

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Date: 
6 April 2018
Andy Pearson