Sigma Accounting - Management accounts

Sigma Accounting:

Sigma Accounting specialises in providing accountancy and business advisory services to owner managed businesses based on the Isle of Man.

For an informal discussion about how we can help you with the accountancy requirements of your business please contact us.

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SIGMA accounting

Sigma Accounting is registered in the Isle of Man (number 023280B)

and is a member of the ICAEW Practice Assurance Scheme.

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Keeping track of your business - Management accounts:

The accounting needs of your business will vary according to its size, type and sector. As the business owner, it's your responsibility to make sure your business keeps accurate records and accounts.

There are two types of accounting information - financial accounts and management accounts.

Financial accounts describe the performance of your business. Management accounts are aimed at helping you to plan your business and make decisions about key areas such as sales, margins and stock.

This page explains the basics of both types of accounts and what they should include. It outlines your financial accounting obligations and details how management accounting can help you run your business more effectively.

Financial accounts

Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Financial accounts normally include the following elements:

Profit and loss account

This measures your business' performance over a given period of time, usually one year.

It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - e.g. the last day of your financial year.

Depending on the size of your business your financial accounts may also include the following elements:

Cash flow statement

This shows how your business has generated and disposed of cash and liquid funds during the period under review. A cash flow statement is different from a cash flow forecast, which is used to predict the expected rises and falls in cash flow over the coming year.

Statement of recognised gains and losses

This records all gains and losses since the previous set of accounts. For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Management accounts

Management accounts can help you make timely and meaningful management decisions about your business.

Different businesses will have different management accounting needs, depending on the business areas that are important to them. These can include:

the sales process - such as pricing, distribution and debtors
the purchasing process - such as stock records and creditors
a fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
employee records

There is no legal requirement to prepare management accounts, but it is hard to run a business effectively without them. Most companies produce them regularly - e.g. monthly or quarterly.

Management accounts analyse recent historical performance and can also include forward-looking elements such as sales, cash flow and profit forecasts. The analysis is usually performed against forecasts and budgets that have been produced at the start of the year.

The information in management accounts is usually broken down so that the performance of different elements of the business can be measured. For example if a business has more than one sales outlet, there might be a separate report for each. There may also be a report produced to show how well a particular product has done across different outlets.

For businesses selling more than one product, it is advisable to provide a financial breakdown for each product category. This will allow you to ensure that profitable products are not subsidising those that are selling poorly, unless you intentionally promote loss leaders to attract further custom.

Uses of management accounting

Management accounts will enable you to: