What are Management Accounts for Hong Kong SMEs?

For most SMEs, monitoring the business finances is the best way to measure performance and mitigate losses.

To do this, you’ll need more than the regular audited annual accounts or daily entries.

Instead, you’ll need an account that shows your business’ financial position over some time. 

Here’s where management accounts come in handy.

Management accounts are great for monitoring a business’ financial performance for a given period.

A management account shows the current economic condition of your business and helps you make better decisions for your small business.

If you own a small business in Hong Kong and you’re wondering if and why you need a management account, keep reading to find out all you need to know about management accounts for Hong Kong SMEs. 

What are management accounts for Hong Kong SMEs?

Management accounts for Hong Kong SMEs are cumulative financial statements for a given period during the business’ financial year.

Thus, management accounts could be prepared monthly, quarterly, or even bi-annually. 

As the name implies, management accounts are prepared for the executives or managers of the business.

Unlike annual audited accounts, which can be shared with the public, in the case of a public company, and with shareholders and third parties, management accounts are only presented to the business owners who utilize these accounts to make daily and long-term decisions for the business. 

Why are the benefits of management accounts for SMEs?

Management accounts provide vital insights required to improve business processes or expand a business.

For example, you can identify and monitor trends in your sales, expenses, and income which can help you improve your business finances and increase productivity. 

More specifically, your Hong Kong small business needs management accounts for the following reasons:

1. Cash Flow Management

A management account gives business owners up-to-date cash flow information.

You can easily spot income and expenses trends in a management account and plan your cash flow management strategy to avoid a financial crisis. 

2. Tax and dividend planning

In computing a company’s tax liability, accountants use management accounts.

For example, tax officials in Hong Kong often consult management accounts to assess whether Hong Kong tax authorities have correctly calculated a company’s profits tax obligation. 

Companies also use management accounts to determine if dividends would be paid in any year. 

3. Improved auditing process

Auditors often need other financial documents to review your business’ financial statement, and the management account is excellent for this.

Also, if you consistently maintain management accounts for your small business, you’ll be able to identify accounting issues and remedy the errors before the auditors’ audit.

4. Fraud detection

Management accounts also help you detect fraud and malpractices easily since you’ll be reviewing your business finances at shorter intervals. 

5. Informed decision-making

A management account helps small businesses to make well-informed business and investment decisions.

For example, you’ll be able to determine when to cut costs to maximize earnings and increase profit with management accounts.

You’ll also know when to invest cash not being used. 

What is the content of a management account?

Preparing a management account is less daunting if you know the content of a management account.

You’ll also be able to interpret and understand the management account if you know its content. 

Typically, management accounts show a company’s:

1. Cash flow statements

Management accounts show the cash flow statements of a business for a period of time.

With this, you can monitor the inflow and outflow of cash for your business for a month or more.

A cash flow statement shows how much money was received in a given month compared to the previous month, how much was spent, any changes to the business’ cash reserve, and the closing bank balance. 

2. Profit and loss statement

A management account will show the flow of the income earned by the business and expenses incurred as well.

This is referred to as a business’ profit and loss statement.

This gives a company insights into actual business performance. 

3. Statement of financial position

The statement of financial position or balance sheet forms part of the management account.

It highlights your business assets, liabilities, and equities.

In addition, it shows your business’s current financial position for the period in view.  

4. Executive Summary

Apart from the specific books of accounts in a management account, management accounts contain key points on different aspects of the business, such as turnover ratios, profit margins, and expenses.

These are usually stated in the executive summary of the management account. 

The executive summary also shows the performance of the different units of your business.

This allows you to compare the performance of the business units.  

5. Key Performance Indicators (“KPI”)

KPIs are indicators that can be used to specifically identify your business goals and monitor how your business is achieving these goals.

As a result, KPIs are frequently used to assess a company’s progress toward its objectives.

A management account usually includes the business KPIs and shows how the business has achieved the goals.

This way, you’ll be able to track short-term and long-term objectives for your business. 

Does your small business need a management account?

While there are several advantages of creating a management account for your small business, it is not compulsory.

Hence, you do not have to produce management accounts for your small businesses. 

But certain circumstances make having a management account desirable. Here are some of these instances

1. When your business needs to make projections using accurate data

 Your small business needs a management account if your business needs accurate financial data to improve day-to-day or long-term business activities.

2. Requests from external parties

 External parties such as auditors, tax authorities, investors, and other stakeholders may demand management accounts when an audited account is unavailable.

Thus, it may be desirable to create management accounts for your small business to meet up with third-party requests.  

3. Management accounts are essential for startups

 If your business is a startup, it may be desirable to have a management account drawn up before completing a financial year and preparing an annual account. 

Conclusion

Management accounts are essential for scaling your small business.

The insights you gain from the management accounts will help you make timely decisions to improve your business growth and profitability. 

If you own a small business in Hong Kong and you’re considering preparing a management account for your business, feel free to take advantage of our bespoke accounting services for small businesses. 

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