It’s often necessary to use a business’ management accounts to analyse its current financial performance and financial position because audited annual financial statements are either not available or not current. While these have their uses they are often prepared internally by the business and arrive in a variety of formats which make the information difficult to understand and to analyse. Here are some pointers;
- Check the period of time covered by the income statement – you may need to annualise some of the figures in the income statement for ratio calculation and comparison purposes.
- Determine whether the business is seasonal. If so, be careful when annualising the figures without making a seasonal adjustment.
- Income statements often don’t show annual or monthly depreciation as an expense because the accountant calculates that figure at financial year end. This omission will result in net profit being overstated in the management accounts.
- There may be some personal expenses of management/directors included which may be removed by the accountant when finalising the annual financial statements.
- Directors’ remuneration may look significantly different (either larger or smaller) when the accountant adjusts it to take advantage of corporate and personal tax allowances.
- Ask the director(s) to sign the management accounts with a confirmation that, to the best of their knowledge, the figures are accurate and a true reflection of the business’ financial performance and financial position.
- Check the revenue shown on the income statement against the credit turnover through the bank account to see if they are similar (assuming the business is not multi-banked). This will give some confidence in the accuracy of the management accounts although remember that turnover through the bank account will include VAT or sales tax while the revenue figure in the management accounts will not, so you will need to adjust for that.
- Compare the key profit margins and other ratios in the management accounts with those calculated from the annual financial statements to see if there is any major disparity.