In terms of accountancy, the preparation of a set of management accounts provides an avenue for up-to-date financial information, reported in such a way as to make business decisions easier. The financial statements for a business are usually prepared on an annual basis at their year end; in contrast, management accounts can be produced as often as needed for the decision-making process. Most managers or business owners cannot wait a year for financial information to help them make decisions. Financial accounts deal with past income and overheads, so they offer little information on expected future economics.
These accounts use both past data and future projections to give managers and business owners a more realistic view of the company’s current financial situation. Not only can executives use management accounts to see past trends in costs and revenue, but they can also use projections from various possible future scenarios to determine how decisions will affect the business’s bottom line. Since management accounts allow for more frequent reporting of the company’s finances, executives need not wait six months to see if a new ad campaign or product is meeting expectations.
Executives can focus on specific areas, departments, or segments of a business, for example, rather than looking over the financial data for the entire company, a retail store can use management accounts to track just sporting goods sales, or accessories. From these reports, managers and owners can determine if a particular area should be expanded to meet demand, or curtailed to prevent wasteful spending on products that are not selling.
A consultant might use them to determine which is the higher income producer, one-to-one consulting, or group training activities. This helps owners and executives determine where to focus their efforts, how marketing strategies are working, and where adjustments need to be made.
One of the biggest benefits of preparing this sort of accounts is their flexibility. Where financial accounts and formal financial statements must follow the Generally Accepted Accounting Principles (GAAP) as used by the Accounting Standards Board (ASB), they need follow no formal guidelines. This allows business owners and operational personnel to disregard certain data, or compare specific costs. For internal purposes, this can provide more flexibility in providing managers with the data they need for daily, weekly, or monthly decisions involving costs and revenue.