How to read your management accounts in ten minutes
Management accounts are the monthly numbers that tell you how the business is really doing. Most owners do not read them because they look like a wall of figures. Five checks are enough to understand almost everything that matters.
In short
- Management accounts have three parts: an income statement (profit), a balance sheet (what you own and owe) and a cash flow view.
- Check gross margin first. If it slips, nothing below it will fix the result.
- Debtor days, creditor days and stock days show where cash is trapped.
- The current ratio shows whether you can pay what you owe in the next 12 months from what you own.
- Read the same five numbers every month, and compare them with last month and the same month last year.
What management accounts are
Management accounts are prepared monthly, for you, not for the tax authority. Unlike annual financial statements, they are quick, flexible and forward looking. They normally contain three views of the business.
- Income statement: sales, costs and profit for the month and the year so far.
- Balance sheet: what the business owns (bank, debtors, stock, equipment) and owes (suppliers, VAT, loans) at month end.
- Cash flow: how the bank balance moved and why.
The worked example
A small business, in one month:
| Income statement | Amount |
|---|---|
| Sales | R500,000 |
| Cost of sales | R300,000 |
| Gross profit | R200,000 |
| Overheads | R150,000 |
| Net profit before tax | R50,000 |
| Balance sheet items | Amount |
|---|---|
| Bank | R90,000 |
| Debtors (money owed to you) | R250,000 |
| Stock | R120,000 |
| Creditors (money you owe suppliers) | R180,000 |
| VAT and PAYE owed | R60,000 |
| Loan instalments due within a year | R40,000 |
Five checks
1. Gross margin. Gross profit divided by sales: R200,000 ÷ R500,000 is 40%. Compare it with last month and with your target. A falling margin points to pricing, discounts, waste or supplier costs.
2. Overheads against gross profit. Overheads of R150,000 use 75% of gross profit, leaving a net margin of 10% (R50,000 ÷ R500,000). If overheads are growing faster than gross profit, the business is getting heavier.
3. Debtor days. Debtors ÷ sales × 30: R250,000 ÷ R500,000 × 30 is 15 days. If your terms are 30 days and customers pay in 15, you are doing well. If it is 60, cash is trapped in unpaid invoices. See our guide to getting customers to pay on time.
4. Creditor and stock days. Creditor days are creditors ÷ cost of sales × 30, so R180,000 ÷ R300,000 × 30 is 18 days. Stock days are stock ÷ cost of sales × 30, so R120,000 ÷ R300,000 × 30 is 12 days. You want to hold stock briefly and pay suppliers as late as your terms allow, without missing them.
5. Current ratio and cash. Current assets (bank, debtors and stock: R460,000) divided by current liabilities (creditors, VAT and PAYE, and loan instalments: R280,000) is 1.64. A ratio above 1 means you can cover the next year's bills from what you have, though a business that is thin on cash and heavy on debtors can still struggle. Always look at the bank balance and the forecast next to it. Our guide to improving cash flow shows how to build one.
Questions to ask each month
- Why did gross margin move?
- Which overhead grew, and why?
- Who owes us the most, for the longest?
- Which supplier is owed the most, and are we within terms?
- What does the cash forecast show for the next 13 weeks?
- What is the one number I would like to change by next month?
What to do now
- Ask your bookkeeper for the pack within ten working days of month end, in the same format every time.
- Track the five numbers in a simple table, month against month.
- Set a target for each, such as gross margin of 40% and debtor days under 30.
- Book 30 minutes a month to go through them, with your bookkeeper or accountant if you can.
- Act on one thing each month, not ten.
Frequently asked questions
How soon after month end should I have the accounts?
Within ten working days is a good target. A pack that arrives six weeks later is history, not management information.
Are management accounts audited?
No. They are prepared for management, and audit or review applies to annual financial statements. Their value is speed and relevance.
What is the difference between profit and cash?
Profit is income minus costs. Cash is what is in the bank. Debtors, stock, tax payments and loan repayments explain most of the gap.
Sources and further reading
This article is general information for South African businesses. It is not tax, legal or financial advice, and it reflects the rules and figures at the date shown above. Tax rules change, so confirm the current position before you act. TBL's practitioners are registered tax practitioners.