Management accounts example: what the figures tell you

Your sales are up. So why is there less cash in the bank?

That’s the sort of question management accounts should answer. A pile of immaculate tables isn’t much use if it leaves you none the wiser. A good management accounts example connects your figures, explains what has changed and points you towards the decisions you need to make.

To show you how this works, we’ll look at a fictional business’s monthly figures. The numbers have been simplified, but the problems they reveal are very real.

A practical management accounts example

Imagine a professional services business that has 18 employees. It has been growing steadily and reviews its figures every month.

Here’s the summary page from its August management accounts:

At first glance, August doesn’t look disastrous. Revenue rose by £20,000 compared with July and came within £10,000 of budget.

Look further down, though, and the picture changes. Operating profit was less than half the budgeted amount. Cash fell by £23,000. Customers were taking longer to pay.

This management accounts example shows why one figure rarely gives you the answer. Revenue went up, but that didn’t produce more profit or cash. The useful information is to be found in the connections between the numbers.

Sales aren’t the biggest problem

August revenue was £200,000. That was £10,000 below budget, but £20,000 higher than the previous month.

It would be easy to stop there and blame the disappointing profit on lower-than-expected sales. But the revenue shortfall was less than 5%. Operating profit missed budget by £24,000.

Something else is going on.

In our management accounts example, the first sensible question isn’t simply, “Why did we miss our sales target?” It’s, “Why did each pound of sales produce less profit than expected?”

That takes us to the gross profit margin.

A six-point fall in margin does real damage

Our fictional business expected a gross profit margin of 60%. It achieved 54%.

Put simply, it expected to keep £60 from every £100 of sales before paying its overheads. Instead, it kept £54.

That six-point difference amounts to £12,000 on August’s £200,000 of revenue. It explains a substantial part of the profit shortfall.

The next job is to find out why. Perhaps the business did one or more of these things:

• Discounted a large project to win the work
• Used more freelance or subcontracted help than expected
• Underestimated the cost of delivering a contract
• Suffered delays or had to redo part of the work
• Sold more of its lower-margin services than usual

The accounts can show you where the margin changed. However, they can’t always tell you why. That’s where a conversation with the people running the work becomes important.

If one poorly priced project caused the fall, cutting costs across the whole business would miss the point. The pricing needs fixing.

Higher overheads matter, but context matters too

As we saw, the firm’s overheads were £6,000 above budget and £8,000 higher than in July.

Again, the total doesn’t tell us what we need to know. That’s why it’s helpful to have a good management accounts report that lets you see which costs moved and whether the increase is likely to continue.

Suppose £4,000 of the overspend was a recruitment fee. That cost is real, but it’s probably a one-off. Compare that with a permanent increase in software subscriptions, rent or salaries, which would affect every upcoming month.

This distinction matters. Without knowing about it, the business might react to one unusual month by making cuts it doesn’t need.

That’s why it’s best to ask this question: which costs will still be here next month?

Profit isn’t the same as cash

Our business made an operating profit of £20,000, but its bank balance dropped from £65,000 to £42,000.

There’s no contradiction here. This is because profit measures income earned and costs incurred during the period. Cash only moves when money is actually received or paid.

The debtor figures also give us a strong clue. Customers were taking an average of 52 days to pay, compared with a target of 35 days. Meanwhile, debts more than 60 days overdue had more than doubled, rising from £18,000 to £39,000.

That means the business had recorded sales and profit without collecting all the money.

This management accounts example includes debtor information for a reason. Without it, the owners might believe their cash problem was caused by poor sales or excessive spending. In fact, a significant part of the pressure came from late payment.

That calls for a different response: chase overdue invoices, resolve disputes quickly, review credit terms and make sure invoices are raised promptly.

Businesses pay wages with cash, not accounting profit. It’s worth knowing where the difference has gone.

The balance sheet shows whether pressure is building

A profit and loss account covers activity during a period. The balance sheet shows the business’s financial position on a particular date.

Looking at the balance sheet alongside the monthly results can reveal whether:

• Customer debts are increasing
• Supplier bills are being delayed
• More cash is tied up in stock
• Borrowing is on the up
• Tax liabilities are accumulating

One month’s figures may reflect timing. A pattern across several months is less easy to dismiss.

If you’d like a fuller explanation of the figures, our guide to reading a balance sheet takes you through them in plain English.

Commentary should explain the “why”

Numbers tell you what changed. Good commentary helps you understand why it changed and what needs to happen next.

For the fictional business above, the commentary might say:

Revenue was £10,000 below budget, but £20,000 higher than in July. Gross profit margin fell from the budgeted 60% to 54%, mainly because one large project was discounted and required £7,000 of unplanned freelance support. Overheads were £6,000 above budget, including a one-off £4,000 recruitment fee. Operating profit was therefore £20,000 against a budget of £44,000. Cash fell to £42,000 as debtor days rose to 52 and £39,000 of invoices became more than 60 days overdue. The immediate priorities are to review the pricing of the discounted contract, recover overdue debts and update the short-term cash forecast.

That paragraph is far more helpful than several pages of unexplained figures.

The management accounts example above doesn’t merely report that profit fell. It separates a pricing problem from a one-off cost and a credit-control problem. Each needs a different response.

That’s why management accounts commentary is brief, specific and tied to action. “Costs were higher than expected” is true but not very helpful. Naming the cost, explaining the cause and saying whether it will recur gives the business something they can use.

A useful management accounts format ends with decisions

There isn’t one compulsory management accounts format. These are internal reports, so they should reflect the business, the people reading them and the decisions those people need to make.

For this business, the management team might agree five actions:

1. Review the price and scope of the discounted project.
2. Decide whether the extra freelance cost can be recovered from the client.
3. Contact every customer with an invoice more than 60 days overdue.
4. Update the 90-day cash forecast using realistic payment dates.
5. Check that new proposals reflect the true cost of delivering the work.

The next management accounts pack should then report progress against those actions.

That closes the loop. The business has used the figures to decide what to do. Next month’s report should show whether those actions worked.

Use this management accounts example as a conversation starter

Your figures won’t look exactly like these. Nor should they.

The point of management accounts isn’t to imitate another company’s report. It’s to understand what is changing in your business while there’s still time to do something about it.

If your current management accounts pack tells you what happened but not why, it’s time to find an accountant who looks closely at your figures and then asks valuable questions. If the margin has fallen, cash is arriving late, or costs are recurring, you need someone who can ask why – and use the evidence to make helpful recommendations.

If you’d like to get more from your figures, THP’s management accounts service gives you regular, tailored reporting with clear commentary from accountants who’ll help you make sense of the figures. Why not get in touch today and ask how we can help? We’d be delighted to hear from you.