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Godknows Hofisi
Introduction
This simplified article looks at how management accounts can be used to improve business management and performance.
Field of accounting
Accounting essentially involves gathering, processing, production and communication of financial and related information about an entity. Ordinarily accounting can be divided into financial and management accounting. In big entities it is quite common to have the positions of financial accountant and management accountant.
Financial accounting
At the core of financial accounting is gathering financial information from source documents, processing it through accounting systems using standard operating procedures or accounting manuals, in compliance with a business’ accounting policies and international financial reporting standards (IFRS). Financial statements are usually prepared annually or half yearly and are usually audited.
Management accounting
Management is known by other names such as Cost and Management Accounting. The main objective of this arm of accounting is to provide information for on-going decision making. The management accounting reports are produced for internal use by management. It is established practice in industry and commerce that these accounts may also be presented to the board of directors for purposes of meetings in different formats or level of detail. The information provided can be used for planning, monitoring and evaluation of the business’ performance.
Components of the management accounts
Unlike annual financial statements whose presentation is guided by IFRS, management accounts are tailor made to suit the entity’s information requirements. However, the following components are widely used in practice:
Annual budgets
These are produced at the beginning of the year and show projections for the year.
Monthly reports
These normally include the Income Statement, State of Financial Position (Balance Sheet), Cashflow, Volumes.
Quarterly reports
The same reports produced monthly are usually produced quarterly (every 3 months) eg Quarter 1 (January – March), Quarter 2 (April – June), Quarter 3 (July – September) and Quarter 4 (October – December).
Ad hoc reports
These are produced as and when required, for example capital investment appraisals, costing and pricing of products, expense analysis, etc.
About annual budgets
The preparation of annual budgets is usually co-ordinated by the Management Accounting function. It involves receiving input from different departments or functions such as Marketing, Production or Operations, support functions such as Human Resources, Risk and Compliance, Company Secretarial, depending on the configuration of the company.
The input has to be in line with the business’ overall corporate strategic and annual plans as well as the particular department or function’s strategic and annual plans.
About preparation of management accounts
The preparation of management accounts involves using different information. The main information is financial which is usually extracted from the entity’s accounting system hence the need to computerise the accounting function.
Other information used include: sales volumes, marketing statistics such as market share, human resource statistics such as head count, etc. Below I focus more on the Income Statement.
Management accounts are prepared using internally designed templates. Where there is a group of companies subsidiaries report to the holding company or head office using group approved templates.
Preparation and interpretation of the Income Statement
The Income Statement which is prepared as part of the Management Accounts normally has the components explained below.
- a) Year to Date (YTD) Income, Expenses and Profit
Current YTD actual income, expenses and profit/(loss).
Current YTD budgeted income, expenses and profit / (loss).
Prior year’s YTD actual income, expenses and profit / (loss)
Variance between current YTD actuals and budgets.
Variance between current YTD and prior year actuals eg 2021 YTD vs 2020 YTD.
- b) Current month (one month) Income, Expenses and Profit
Current (one) month actual income, expenses and profit / (loss).
Current (one) month budgeted income, expenses and profit / (loss).
Same month but in prior year (e.g. 2020) actual income, expenses and profit / (loss)
Variance between current month actuals and current month budgets.
Variance between actuals for current month (eg October 2021) and same month in the prior year (eg October 2020)
- c) Quarterly Income, Expenses and Profit
The same analysis as in (a) and (b) above but done per quarter ie covering periods of 3 months.
Use of graphs
Graphs are usually good at showing trends. It is therefore advisable to show financial performance through graphs.
Variance analysis
This part is very important but is either not understood or simply overlooked. Reasons leading to variances should be investigated thoroughly and corrective action taken.
When variances are negative it means the business is under-performing compared to current budgets or prior periods. Where variances are positive it means the business is performing well compared to its current budgets and this could point to opportunities to do even better.
Variances can be caused by different factors such as difference between budgeting assumptions and the actual macro –economic environment, volume variances (selling or production), pricing and competition, over or under budgeting or many other factors.
Conclusion
Both financial and management accounting are important to a business. Management accounting is an important tool in managing the performance of a business and should be taken seriously. Non-finance people in management positions or on the board of directors are encouraged to be trained so that they have an appreciation of accounting especially interpretation of financial and management reports.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and is an experienced director of companies. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]
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