Introduction to financial and management accounts

Stakeholders

Financial statements are valuable to the individuals and groups who wish to track the financial performance of an organisation (stakeholders).

The definition of a stakeholder is a person or group that has an interest in an organisation and can be split into internal or external.

Internal stakeholders will include those that work in an organisation such as management and staff.

External stakeholders are those parties who are not employed by the business. Examples of external stakeholders are shareholders, customers, suppliers, regulators and those who may be interested in investing in the organisation.

Example: International Hotels Group stakeholder analysis

Source: IHG (2020)

Recording of financial transactions

All financial transactions that take place in an organisation should be recorded in an accounting system. Almost always this will be a computerised accounting system, e.g. SAP, Sage, etc.

The statements which are produced can be divided into two main categories. These are management and financial accounts.

Management accounts

Management accounts are usually produced monthly. They typically report how an organisation, or an operating unit within the organisation, is performing compared to a budget (a financial plan prepared in advance). Comparisons might also be made with the performance in the previous year or against its peer group.

These accounts are almost always designed specifically for internal use and are not often seen externally.

They are used by managers and directors within the organisation to review performance. If necessary, actions can be taken as a result. For instance, the organisation might decide to increase advertising expenditure in order to increase sales. If costs are too high (perhaps causing losses), action could be taken to reduce them, e.g. by using a different supplier.

Financial accounts

Financial accounts are normally produced at least once a year, and report performance in the financial period just ended. There is a statutory requirement that all companies publish financial accounts, which are usually in a similar format. These financial accounts are used by external stakeholders and are of particular interest to shareholders, or to those who are considering an investment in the company or to lenders. Unless a company is very small, the financial accounts are verified by an independent external firm of auditors.

Unless a company is small, the financial accounts will usually contain the following statements:

• income statement (often referred to as a profit and loss account, or P&L)
• statement of financial position (often referred to as a balance sheet)
• statement of cashflows
• statement of other comprehensive income (which may be combined with the statement of profit or loss)
• statement of changes in equity.

Published financial statements also contain notes. The notes set out additional detailed financial information, supplementing the information in the financial statements.

The focus of this step is on financial accounts, and useful ratios that can be calculated using the figures within them. In the following two steps you will see some examples of two key statements: the income statement and the statement of financial position.

You should also take the opportunity to review an example of a year in review below, produced by IHG.