Reading Management Accounts: What to Look For and What to Ignore

Before a buyer gets access to audited accounts in due diligence, they typically see management accounts — monthly or quarterly internal statements that the business produces for its own monitoring. These documents are your first real look at how the business performs and how it is managed. They are also one of the most commonly misread and most easily manipulated financial documents in the M&A process.

Understanding what management accounts are, how they differ from audited accounts, and what to look for in them is a prerequisite skill for any serious acquirer.

What Management Accounts Are

Management accounts are financial statements prepared by management (or the company's bookkeeper or accountant) for internal monitoring purposes. They are typically produced monthly or quarterly and include, at minimum: a profit and loss statement (income statement), a balance sheet, and sometimes a cash flow statement.

They are:

Prepared internally by the company, not by an external auditor
Unaudited — no independent verification of the figures
Not standardised — there is no requirement in Malaysia for a specific format; every company structures them differently
Not filed with any regulatory authority (unlike audited accounts, which are filed with SSM)
Current — typically available within four to eight weeks of the period end, compared to audited accounts which may be six to twelve months old

Their value is timeliness. An audited P&L for FY2024 filed in March 2025 tells you nothing about the current year. A set of management accounts for January–November 2025 tells you where the business is right now.

How Management Accounts Differ from Audited Accounts

The most important difference is the absence of independent verification. An auditor reviews the evidence supporting financial statement figures — bank confirmations, debtor confirmations, physical inventory counts, contracts, invoices. Management accounts contain no such verification. The figures are what management says they are.

Example:

Khazanah Retail Sdn Bhd, a fashion retail chain in Kuala Lumpur, presented management accounts for the six months ending June 2025 showing RM 8.2 million in revenue and RM 1.1 million EBITDA. The audited accounts for the full FY2024 showed RM 14.8 million revenue and RM 1.6 million EBITDA. On the surface, the half-year run rate looks consistent with the annual figure.

However, a comparison of the two documents revealed:

Management accounts included RM 600,000 of revenue from a consignment arrangement where the goods had not yet been sold — this was reversed in the audited accounts
The management accounts used straight-line depreciation over eight years; the auditor applied a five-year rate (more conservative), increasing annual depreciation by RM 180,000
A bonus accrual of RM 220,000 paid in July (after the June management accounts date) was not accrued in the management accounts but appeared in the audited accounts

Adjusted management accounts EBITDA: RM 1.1M - RM 0.6M (consignment revenue reversal) + RM 0.18M (depreciation — EBITDA add-back) - RM 0.22M (bonus accrual) = RM 0.46M

The management accounts overstated the half-year EBITDA run rate by approximately RM 640,000 on an annualised basis. At a 4x multiple, this represents RM 2.56 million in overstatement of enterprise value.

How to Read a Profit and Loss Statement

Revenue. Start here. Look for the revenue recognition policy: when is revenue recorded — on invoice date, on cash receipt, on delivery confirmation? In a well-run business, there is a written policy and it is consistently applied. Revenue that is recognised "when invoiced" rather than "when delivered" is an aggressive policy.

Examine the revenue trend: month by month, not just the year-to-date total. A business showing RM 1 million per month for nine months and RM 3 million in October is not a RM 12M annualised business — something happened in October that may not recur.

Gross profit and gross margin. Gross profit is revenue less the direct cost of goods sold or services delivered. Gross margin is gross profit as a percentage of revenue. Examine this percentage month by month. In a stable business with consistent pricing and input costs, gross margin should be relatively consistent. Material month-to-month variation requires explanation: changes in product mix, input cost spikes, discounting, or — critically — deferred cost recognition.

Overhead structure. Below gross profit, the P&L shows overhead costs: staff salaries, rent, utilities, marketing, professional fees, depreciation. For each material line item, ask: is this cost recurring? Is it consistent with the prior year? Is it reasonable for a business of this size?

Pay particular attention to: director and management salaries (are they above market?); rent (is this to a related party at above-market rates?); professional fees (are these for ongoing operational services or one-off items?).

What to Look For in a Balance Sheet

Trade receivables (debtors). Calculate debtor days: receivables divided by daily revenue. A business with RM 2M in receivables and RM 500,000 in monthly revenue has 122 debtor days — meaning customers are paying on average four months after invoicing. For most Malaysian SMEs, 30–60 days is normal; 90+ days is a risk indicator. Look at the aging schedule: how much is overdue by 90+ days? Provisions against bad debts?

Inventory. For product businesses, how many days of sales is the current inventory? Has inventory grown faster than revenue? Old or slow-moving inventory that is not written down inflates assets and will require write-offs by the new owner.

Trade payables (creditors). Calculate creditor days: payables divided by daily cost of goods sold. Very long creditor days (90+ for a business where supplier terms are 30 days) may indicate cash flow difficulties. Very short creditor days when the business has historically taken longer may indicate advance payments have been made to temporarily reduce the payable balance.

Director loan account. A debit balance in the director loan account means the company has lent money to the director — the director owes money to the company. This is a red flag for both governance (the company is funding personal expenses) and tax (LHDN may assess the loan as a benefit in kind or dividend). In a sale, this must be resolved before completion.

How to Spot Manipulation

Suspiciously smooth results. Real businesses have volatility — months that are better or worse due to seasonality, contract timing, or operational disruptions. If every month shows exactly the budgeted figure, or revenue grows consistently by 2% per month with no variation, be sceptical. Actual performance almost never looks this clean.

Consistently round numbers. Revenue of RM 1,000,000 in January, RM 1,020,000 in February, RM 1,040,000 in March — these numbers are engineered. Real revenue figures are not round.

Related-party transactions appearing and disappearing. A large intercompany sale in Q3 that does not recur in Q4 requires explanation. It may have been legitimate, but it may also have been used to achieve a revenue target in a specific period.

Expenses below budget for multiple consecutive months. If actual staff costs are consistently below budgeted staff costs, either the budget is poorly prepared or costs are being deferred. Deferred expenses reduce current-period costs and improve reported profit — but the costs are real and will need to be paid.

Asking for the Right Data

When requesting management accounts from a seller, ask for:

Three full years of monthly management accounts (P&L and balance sheet)
Current year-to-date monthly management accounts
The most recent audited accounts for each of the last three financial years
A reconciliation from the management accounts to the audited accounts for the most recently audited year

The reconciliation is the key document. It will tell you precisely what adjustments the auditor required when converting the management accounts to audited figures — and those adjustments are a direct window into management's accounting practices.