Financial and management accounts: the basics

Uses of management accounting

Management accounts will enable you to:

• compare your accounts with original budgets or forecasts
• manage your resources better
• identify trends in your business
• highlight variations in your income or spending which may require attention

They should be used for the following:
Record keeping

• recording business transactions
• measuring results of financial changes
• projecting financial effects of future transactions
• preparing internal reports in a user-friendly format

Planning and control

• collecting cash
• controlling stocks
• controlling expenses
• co-ordination and monitoring of strategy/performance
• monitoring gross margins

Decision making

• using cost information for pricing, capital investment and marketing
• evaluating market and product profitability
• evaluating the financial effect of strategies and plans

• The importance of maintaining accurate accounts

  It's important that your accounts are accurate and up to date, and that they are backed up with detailed records, such as receipts, invoices and purchase orders, payments in and out, etc. See the page on keeping accurate records in our guide on how to set up a simple profit and loss account for your business.
  Following careful record keeping procedures can also help you to prevent fraud or theft. As businesses grow and take on more workers, the risk of theft or fraud can increase. There are steps you can take to reduce the risks.
  

  What is false accounting?

  False accounting is when someone:
  
• deliberately records false financial information - for example to hide losses or appear more successful
• changes or destroys records
• exaggerates the business' assets or understates its liabilities

An employee adding a few pounds to an expenses claim could also constitute false accounting, for example. However, more serious fraud could mean that your business suffers major financial losses, or that it's been trading while insolvent.

What to do if you think an employee has been falsifying accounts

False accounting is a type of theft and should be reported to the National Fraud Reporting Centre (NFRC). The matter may then be passed to the police to investigate. Your business can also take action to recover any losses if an employee was involved.
You can contact the Action Fraud Helpline on Tel 0300 123 2040. Find information about fraud, scams and identity theft on the Action Fraud website - Opens in a new window.
You'll need to work out how much the business has lost and how the fraud occurred. You might need to use an accountant or auditor to do this - possibly one from outside the business. Don't wait for them to complete this work - report the fraud immediately.
You may suspend an employee while the investigations are carried out but you can only do this if their contract of employment allows it. For further guidance on this, see the page on investigating disciplinary matters in our guide on handling disciplinaries.

Reduce the risk of false accounting

Common sense and sound business practices will help you to protect your business against the risks of theft and fraud. For example, you should:

• Maintain thorough recruitment procedures and carry out pre-employment checks such as checking references - see our guide on pre-employment checks.
• Put in place a whistle-blowing policy and try to encourage a culture of fraud awareness across the business.
• Have a 'zero tolerance' approach to employee theft and fraud and clearly state this in employees' terms and conditions or your discipline and grievance policy. See the page on policies on discipline, grievance, bullying and harassment in our guide on how to set up employment policies for your business.
• Restrict access to financial information and divide duties so that no one person is responsible for the accounts and have more than one person to authorise payments.
• Check bank statements and other accounts - look into any unusual transactions or discrepancies, and audit processes and procedures from time to time.
• Commission a registered auditor, who would usually be a qualified accountant, to conduct an external audit to examine the business' financial report to check that they show a true and fair view of the business' financial performance and its assets and liabilities.
• Undertake an assurance report, which can be carried out by an external accountant, to review the business' accounts as a whole, but check specific aspect where necessary. This report is similar to an external audit, but with more limited scope and objectives.

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