‘Two accountants are in a car. The financial accountant looks out the back window and records its journey. The management accountant is in the driving seat, plans where the car is going, how fast it is going and aligns its direction.’
Popular accounting allegory
In a nutshell
Management accounts are best understood by contrasting them with financial accounts.
Financial accounts report ‘what has happened’ in a business. Management accounts seek to explain ‘why it has happened’.
Financial accounts are required by law to report the historic financial results of a company to shareholders.
Management accounts are produced for operational purposes. They provide more timely and detailed information to company directors and managers, to help them run a business efficiently and effectively.
Management accounts analyse past and present information, both financial and non-financial, to help a company make more informed decisions about its future.
Need to know 
Management accounts are often produced by management accountants in a ‘pack’, sometimes referred to as the ‘monthly management pack’ or ‘management accounts pack’, hereafter MAP.
Why is this important? 
The success of a business is directly related to the quality of its decisions. To make quality decisions, businesses need access to timely, accurate, reliable, relevant and insightful information. The key source of information for a board of directors is the MAP.
The role of finance is evolving in many organisations, moving beyond the traditional role of reporting historic financial information, into providing what is often referred to as ‘business partnering’ support. This is where finance helps management to understand the business through analysing financial and non-financial information, which in turn can help a business make better decisions. For example, while the financial accounts may report the turnover number as a single number, the MAP will break this number down by product and geography. This can enable management to identify which products and regions are the most (or least) successful and this, in turn, will help management focus future investment and attention.
When is this important? 
Frequency
Whereas financial accounts are produced annually (although listed companies will also release ‘interim’ or six-monthly accounts), MAPs are produced far more frequently.
MAPs are typically produced monthly, although some companies may produce them more often, for example on a weekly, or even daily, basis. Although technology has enabled more companies to move closer to the ideal of real-time information, monthly MAPs are still common and will include other relevant management information (see the Nice to know section below) to be discussed at monthly board meetings. In addition, there is a difference between real-time data (which may just be numbers) and MAPs (which also include analysis and require professional judgement).
Time lag
For a large company, financial accounts can take weeks, if not months, to produce. This is mainly due to ensuring that all transactions are included, various required disclosures are made (see Chapter 19 Accounting and financial reporting standards) and audits are undertaken (see Chapter 20 External financial audit). In addition, it could be up to 9 months after the year end before the accounts are released into the public domain (see Chapter 21 Information in the public domain).
As MAPs are used to run a business and make critical decisions it is essential that they are produced promptly. A well-organised accounting and finance function can produce MAPs within a few days following the month end. Timely information not only enables quicker decisions to be made but also enables issues and opportunities to be identified earlier.
In practice 
Requirement
Unlike financial accounts, which are a requirement under company law, there is no requirement to produce MAPs. While full MAPs will be common in large companies, they are less likely to be produced or cover the same breadth and depth in many SMEs (small and medium-sized enterprises). A factor in the success and growth of SMEs into large companies is likely to be the quality of its MAPs.
Format
While financial accounts are standardised through comprehensive accounting regulation (see Chapter 19 Accounting and financial reporting standards), there are no accounting standards for MAPs. Indeed, one of their key advantages is that they can be tailored to business needs. There are, however, some established conventions (see the Nice to know section below) and many MAPs follow the format of the primary financial statements.
Scope
Financial accounts summarise a whole business, even where there are many different products and/or services sold in different markets.
MAPs can drill down into whatever detail is required, for example, divisions, departments, individual products, services, markets or customers.
Accuracy
Financial accounts need to be ‘true and fair’ and free from ‘material’ misstatements (see Chapter 20 External financial audit). Figures are often produced in £’000 or £m depending on the size of the company.
As management accounts are used to make critical business decisions, they will usually need to be more accurate than financial accounts, depending upon the decision being made.
The ideal MAP
The ideal MAP should be tailored and relevant to each company’s needs. It should be produced on a timely basis and contain the right quantity and quality of information, presented clearly and cost effectively.
Nice to know 
Contents of a typical MAP
According to CIMA (Chartered Institute of Management Accountants) the ideal MAP should be between 10 and 20 pages and contain the following:
- ■Executive summary identifying all key issues with a synopsis of KPIs (key performance indicators).
- ■Action plan specifying corrective actions and contingencies with best- and worst-case scenarios.
- ■P&L account showing period and cumulative positions with updated projections. Variances against budget should be highlighted with major variances explained. Trend analysis should be shown graphically.
- ■Projected profit recalculated on the basis of actual performance and action plans.
- ■Profiled cash flow summarising actual and projected receipts, payments and balances on a regular basis to year end.
- ■Analysis of progress of major capital schemes, showing percentage completion, current and projected expenditure, completion cost and timescale.
- ■Balance sheet showing working capital position in tabular form or using performance indicators, e.g. debtor and creditor days.
CIMA also emphasises that the MAP should be easy to assimilate and contain graphs, charts, colour-coding, clear headings and selective highlighting. CIMA suggests that supplementary information should be provided as an appendix only if it is vital to the board’s understanding of the report.
Other useful contents for a MAP include:
- ■Commentary. To add value, the MAP should ‘make the numbers talk’ and provide a ‘story’ of what has happened and its impact on projections.
- ■The order book and other ‘lead’ versus ‘lag’ indicators of performance.
- ■Non-financial information. The MAP should not just contain financial information. Kaplan and Norton’s ‘Balanced Scorecard’ suggests balancing financial information with the following additional perspectives:
- ■Customer – for example new, repeat and lost customer data
- ■Internal business processes – for example productivity and efficiency measures
- ■Learning and growth – for example new product development and training.
As indicated in the Need to know section above, MAPs are not one size fits all, and their size, complexity and contents will differ from organisation to organisation, depending on the size of the company and the requirements of its users.
Extract of typical headings in a MAP
A MAP will typically contain detailed financial statements on a month-by-month and year-to-date (cumulative) basis.
Benchmarks are useful to management in assessing performance and ‘actual’ results will usually be compared to budget, forecast (see Chapter 34 Budgeting and forecasting) as well as prior year.
Example
| Last month’s marketing expenditure | ||||||
| £’000 | Comparison | |||||
| Actual | Budget | Q3F | Prior Yr | Act v Bug | Act v Fcst | Act v P Yr |
| 100 | 95 | 102 | 90 | (5) (5%) | 2 (2%) | (10) (11%) |
| Year to date (YTD) marketing expenditure | ||||||
| £’000 | Comparison | |||||
| Actual | Budget | Q3F | Prior Yr | Act v Bug | Act v Fcst | Act v P Yr |
| 1,000 | 1,050 | 980 | 1,100 | 50 5% | (20) 2% | 100 9% |
| Full year (FY) marketing expenditure | ||||||
| £’000 | Comparison | |||||
| Act + Fcst | Budget | Q3F | Prior Yr | FY v Bug | FY v Fcst | FY v P Yr |
| 1,150 | 1,200 | 1,250 | 1,200 | 50 4% | 100 8% | 50 4% |
Optional detail 
Reconciliation between financial and management accounts
Financial and management accounts must ultimately reconcile. This is an essential control in business, especially when the information comes from different sources and MAPs are being used to make critical business decisions.
Enterprise resource planning (ERP) and spreadsheets
ERP is a system of integrated IT applications used to manage a business and automate many back-office functions, including accounting, supply chain, operations, manufacturing and human resources. ERP has made the production of MAPs much quicker and more efficient (see Chapter 2 Finance personnel and systems).
Alongside the growth in ERP, technological developments such as CRM (customer relationship management), cloud computing and social media have increased the amount of data available for businesses to analyse. This has led to the emergence of new management accounting practices, such as:
- ■business intelligence: the interpretation of raw data to explain performance
- ■business analytics: insights into performance from a continuous, iterative and methodical exploration of data and
- ■big data: computational analysis of very large data sets to reveal patterns, trends, and associations, such as customer behaviour and interactions.
Spreadsheets still play a central role in the majority of management accounting departments. While ERP systems are established in many large organisations, they are less common in SMEs which largely rely on spreadsheets to produce MAPs.
Most accounting systems are designed for processing transactions such as invoices and payments and therefore MAPs are often produced by importing data from these systems and ‘crunching’ the numbers in a spreadsheet.
Reflect and embed your understanding 
For an example organisation:
- 1Compare the annual financial statements with the MAP for the same period to highlight the differences in detail within each report. Which provides more valuable insight to management to enable decision making?
- 2What is the most value adding part of your MAP?
- 3What is the least value adding part of your MAP?
- 4What would you like to see in your MAP that you currently don’t receive?
- 5Does the MAP help to inform your business decisions?
For the authors’ reflections on these questions please go to financebook.co.uk
Where to spot in company accounts 
The MAP is an internal document and will not be published in the public domain.
Banks (see Chapter 30 Debt finance), Venture Capitalists and Private Equity (see Chapter 29 Equity finance) may require a business to share MAPs as part of their financing arrangements.
Extract from Greggs plc 2020 annual report and accounts
Greggs plc have implemented and continued to develop an Enterprise Resource Planning (ERP) system in recent years. This system will be an essential tool in producing Greggs plc’s MAP.
See this section within Chapter 2 Finance personnel and systems for relevant extracts from Greggs plc’s annual report and accounts.
Consolidate and apply
To see how the concepts covered in this chapter have been applied within Greggs plc, review Chapter 36, p. 427.
- →The size, experience and effectiveness of the management accounting team.
- →If the management accountants are seen as an overhead or value adding finance business partners.
- →The quality and amount of information in the MAP.
- →The integration of financial and non-financial information in the MAP.
- →The frequency and regularity of the MAP.
- →The time taken to produce the MAP.
- →The cost of producing the MAP.
- →The action management takes, i.e. does the MAP drive decision-making or is it an activity that should be ‘abandoned’ (Peter Drucker, American management consultant, educator, and author).