What management accounts are for
A company's statutory accounts are prepared once a year for Companies House and HMRC, and by the time they are filed they describe a year that ended months earlier. Management accounts come from the same books, closed every month and laid out for the people running the business. They show what the company earned and spent, what it owns and owes, how its cash moved, and what changed since the month before.
Company law requires every company to keep accounting records that can show its financial position with reasonable accuracy at any time, under section 386 of the Companies Act 2006. Monthly management accounts use those records to answer three questions for a startup spending ahead of its revenue: how much cash is left, how long it will last, and whether the money being spent is producing growth.
Investors want answers to the same questions, so the monthly figures also feed your shareholder updates, your board papers and, when you next raise, the data room. The sections below set out what the pack should contain, how to calculate each number from your books and how often to review them, followed by a worked example for an illustrative software company.
What this guide covers
- What monthly management accounts contain
- Burn, runway and recurring revenue
- Gross margin, acquisition cost, lifetime value and churn
- Review timetable and the monthly investor update
What monthly management accounts contain
A monthly pack has four parts. Keep the layout the same from month to month so that changes stand out.
Profit and loss account
The profit and loss account shows revenue, cost of sales, gross profit, overheads and the profit or loss for the month and for the year to date. Once you have a budget, show it next to the actual figures with the difference in pounds. Group the costs so that the numbers later in this guide can be read straight from the page. Cost of sales holds the costs of delivering the product, such as hosting, software built into the product, payment processing and customer support. Overheads split into sales and marketing, product and development, and general and administration.
Revenue belongs in the month the customer receives the service. UK accounting standards recognise revenue as the service passes to the customer, as the Financial Reporting Council's summary of FRS 102 explains. A customer who pays £12,000 upfront for a year therefore adds £1,000 of revenue in each of the twelve months, and the part not yet earned sits on the balance sheet as deferred income.
Balance sheet
The balance sheet lists what the company owns and owes at the month end: cash, money owed by customers, costs paid in advance, equipment, money owed to suppliers, deferred income, the VAT, payroll taxes and corporation tax owed, loans, and shareholders' funds. Add two supporting lists each month. A list of customer balances by age shows who is paying late, and a list of tax balances shows bills building up before they fall due.
Cashflow statement
The cashflow statement explains how the bank balance moved, split between cash from trading, cash spent on equipment, and cash raised from shares or loans, and burn and runway are calculated from it. In a startup, the loss in the profit and loss account and the cash that left the bank can differ by a wide margin. Annual subscriptions paid upfront, VAT collected before it is paid to HMRC, a research and development tax credit received in a single month and equipment bought outright all move cash differently from profit.
Key numbers and commentary
One page brings together the numbers covered below: cash, net burn, runway, monthly recurring revenue, gross margin, customer acquisition cost, churn and headcount, each compared with last month and with budget. Under it, a short commentary explains the largest differences from budget and what is being done about each, in plain sentences such as "Hosting was £1,200 over budget because two customers moved to the higher-usage plan."
Closing the books each month
Reliable monthly figures depend on following the same close routine every month.
- Reconcile every bank account, company card and payment platform to its statement.
- Check that every sales invoice and customer receipt is recorded, and that the subscription billing system agrees with the accounts.
- Record supplier bills, and add accruals for costs incurred but not yet invoiced.
- Spread annual payments across the months they cover, putting upfront customer payments into deferred income and prepaid costs such as insurance into prepayments.
- Post payroll, employer National Insurance and pension costs.
- Check the VAT, payroll tax and corporation tax balances against returns and payments.
- Record depreciation on equipment.
- Review the lists of customer and supplier balances by age.
Burn and runway
Gross burn is all the cash the company paid out in the month. Net burn is the cash paid out minus the cash received. Runway is the number of months the cash in the bank would last at that rate, which is cash at the month end divided by monthly net burn.
Some receipts and payments happen once and distort the figure. A research and development tax credit, a grant instalment or money from a share issue reduces net burn in the month it arrives and makes runway look longer. A year's insurance paid in one month does the reverse. Report underlying net burn with those items removed, list them separately, and use the average of the last three months so that one unusual month does not swing the answer.
Runway on current burn assumes nothing changes. If your plan includes new hires or higher marketing spend, work out a second figure from your cashflow forecast showing the month the money runs out on the plan. Our runway and forecasting guide covers building that forecast.
Monthly and annual recurring revenue
Monthly recurring revenue is the subscription income the company would bill next month from its current customers if nothing changed. Count each active subscription at its monthly value, so an annual contract worth £12,000 counts as £1,000. Leave out one-off set-up fees, consultancy, usage charges that vary from month to month, and VAT. Annual recurring revenue is monthly recurring revenue multiplied by 12. Investors often shorten the two to MRR and ARR.
Build the figure each month as a bridge from your billing system.
- Monthly recurring revenue at the start of the month
- plus subscriptions from new customers
- plus increases from existing customers, such as upgrades and extra seats
- minus reductions from existing customers who downgraded
- minus subscriptions from customers who left
- equals monthly recurring revenue at the end of the month
Monthly recurring revenue will not match revenue in the profit and loss account. The accounts include one-off fees and record income across the month as it is earned, while the recurring figure is a snapshot of subscriptions live on the last day. Reconcile the two each month and explain any gap that keeps growing.
Gross margin
Gross margin is gross profit as a percentage of revenue, where gross profit is revenue minus cost of sales. It shows how much of each pound of revenue is left to pay for selling, product development and overheads. Show gross profit in pounds next to the percentage, and keep the same costs in cost of sales every month. Moving support salaries between cost of sales and overheads changes the margin without any change in how the business performs.
Customer acquisition cost and payback
Customer acquisition cost is the amount spent to win each new customer. Divide total sales and marketing costs for a period by the number of new customers won in the same period. Include salaries and commission for sales and marketing staff, advertising, agencies, events and sales software. If deals take months to close, work it out a quarter at a time, because spending this month may win customers next month.
Payback period is the number of months of gross profit from a new customer needed to recover what it cost to win them. Divide customer acquisition cost by the new customer's monthly recurring revenue multiplied by gross margin. Gross profit is used because the cost of serving the customer has to be paid before anything is left to recover the acquisition spend.
Lifetime value
Lifetime value estimates the gross profit a typical customer produces before they leave. The usual calculation divides monthly gross profit per customer by the monthly customer churn rate. A monthly churn rate of 2.5% implies an average customer life of 40 months, because 1 ÷ 0.025 = 40.
The formula assumes today's churn rate holds for years. With a small customer base, one or two cancellations move the churn rate a long way, so state the churn rate you used and show lifetime value in pounds next to customer acquisition cost. Once you have more history, compare the estimate with what each month's intake of customers has actually paid to date.
Churn
Customer churn is the share of customers who leave in a month, calculated as the number who cancelled during the month divided by the number at the start of the month.
Revenue churn measures the loss in pounds. Gross revenue churn is monthly recurring revenue lost to cancellations and downgrades, divided by monthly recurring revenue at the start of the month. Also show how much of the opening monthly recurring revenue is still being billed to those same customers at the month end, after upgrades, downgrades and cancellations. Investors call that figure net revenue retention when it is shown as a percentage of the opening amount.
Worked example for an illustrative software company
The figures below are illustrative, for a company selling software subscriptions to other businesses and reporting its June numbers. All amounts exclude VAT.
The June figures
- Customers: 120 on 1 June, 12 new, 3 cancelled, 129 on 30 June.
- Monthly recurring revenue on 1 June: £48,000, an average of £400 a customer.
- Changes in June: £4,800 from new customers, £1,000 of upgrades, £600 of downgrades and £1,200 lost from cancelled customers.
- Revenue in the profit and loss account: £53,000, of which £50,000 is subscriptions and £3,000 set-up fees.
- Cost of sales: £11,000, made up of hosting £4,500, software built into the product £1,500, customer support salaries £4,000 and card processing £1,000.
- Overheads: sales and marketing £30,000, product and development £45,000, general and administration £15,000.
- Cash: £57,500 received, £103,500 paid out, £690,000 in the bank on 30 June.
- Net burn of £41,000 in April and £47,000 in May, with no one-off items in April, May or June.
The calculations
- Monthly recurring revenue on 30 June: £48,000 + £4,800 + £1,000 − £600 − £1,200 = £52,000. Annual recurring revenue: £52,000 × 12 = £624,000.
- Gross profit: £53,000 − £11,000 = £42,000. Gross margin: £42,000 ÷ £53,000 = 79.2%.
- Result for the month: £42,000 of gross profit less £90,000 of overheads gives a loss of £48,000.
- Gross burn: £103,500. Net burn: £103,500 − £57,500 = £46,000.
- Average net burn over three months: (£41,000 + £47,000 + £46,000) ÷ 3 = £44,667. Runway: £690,000 ÷ £44,667 = 15.4 months.
- Customer acquisition cost: £30,000 ÷ 12 new customers = £2,500.
- Monthly gross profit from a new customer: £400 × 79.2% = £316.80. Payback: £2,500 ÷ £316.80 = 7.9 months.
- Customer churn: 3 ÷ 120 = 2.5% for the month.
- Lifetime value: £316.80 ÷ 2.5% = £12,672 of gross profit, against £2,500 spent to win the customer.
- Gross revenue churn: (£600 + £1,200) ÷ £48,000 = 3.75%. Still billed to customers who were there on 1 June: £48,000 + £1,000 − £600 − £1,200 = £47,200, which is 98.3% of the opening amount.
Taken together, the company loses £48,000 a month on paper and £46,000 in cash, has about 15 months of cash at its recent burn, earns back the cost of a new customer from under eight months of gross profit, and a month later still bills £47,200 of every £48,000 of opening subscriptions before counting new sales. The commentary would explain what caused the downgrades and whether planned hires shorten the runway.
How often to review the numbers
- Weekly. Check the bank balance against a 13-week cash forecast, so that a late customer payment or a large bill is seen coming.
- Monthly. Close the books and produce the management accounts pack by a fixed working day, such as the tenth, then review it with your co-founders and send it to the board.
- Quarterly. Re-forecast the rest of the year, test the budget assumptions against what has happened, and agree any changes at a board meeting.
- Annually. Agree a budget for the next financial year before it starts, and prepare the statutory accounts and corporation tax return after the year end.
What a monthly investor update includes
A monthly update to shareholders is a short email in the same format each month, drawn from the management accounts. It usually covers these points.
- Cash at the end of the month and at the end of the month before
- Underlying net burn, with one-off receipts or payments listed separately
- Runway on current burn and on the plan
- The main growth figure, such as monthly recurring revenue, and how it changed
- One figure that predicts growth, such as qualified pipeline or trials started
- Headcount, with offers made and people leaving
- Problems and what is being done about them, near the top
- One or two specific requests, such as an introduction to a named investor
Our post on the monthly investor update covers the format and the burn calculation in more detail. If your shareholders' agreement gives investors information rights, it sets out what they must receive and by when, which can include the management accounts themselves.
Help with monthly management accounts
Business Pulse is our service for founders who want the monthly numbers produced and explained. It provides an annual budget, a rolling 12-month cashflow forecast, management accounts and a regular meeting to go through them, from £249 a month + VAT with a quarterly meeting or from £499 a month + VAT with a monthly one, plus a one-off set-up fee from £750 + VAT. Our pricing page lists all our fees.
