Every limited company must file a set of accounts with companies house following the end of each financial year. This is statutory requirement, and is seen by some as a necessary evil, however far from being just a box ticking exercise, a set of accounts can provide you with valuable information about your company and its performance, allowing you to make better decisions and plan for the future.
The benefits can be limited however, if you only see a set of accounts once a year. Many companies (large and small) will engage an accountant, or employ one to produce monthly management accounts.
For smaller companies looking to control spending, this may seem like adding an unnecessary cost, but the benefits nearly always outweigh the expense. Here (in no particular order) are our top ten reasons why-
1. Helps to control costs-A monthly set of accounts makes it very easy to compare costs month to month, and to expectations. Often savings can be found by analyzing costs in mote detail. We recently saved a client £12K by spotting an overcharge they had suffered on their invoice discounting facility. The overcharge went back 2 years and was rather tricky to spot. This would not have been possible without interrogating the costs regularly and in detail
2. Can send to banks and other financiers-if you are looking to raise finance from a bank or investor, usually a good business plan, backed up by forecasts and accounts, can dramatically improve your chances of success. However this can be difficult to do, using a set of accounts that are 6 months or more out of date, especially if the business performance has changed significantly since the last financial year end
3. Can be sent to suppliers to help obtain credit-anyone that has access to credit checking software will be able to see how filing accounts effects you credit rating. However if you have good 1st quarter result, it could be more than 12 months before this has any impact on your credit rating. Often suppliers may accept a set of management accounts to give or extend credit terms.
4. Can compare to budgets and forecasts-Usually business leaders will have an idea of where they want their business to go, and how it should perform. Often reality is different from expectations. The difficult part is spotting where those differences lie. Budgets and forecast can easily be integrated in management accounts, providing a visual aid to easily see the specific causes of any variances
5. Helps with cash planning –Cash is not the same as profit. For example some companies may collect payment from their customers up front, but obtain credit from suppliers. In the gap between receiving cash and paying suppliers the company may have other costs to pay out, such as wages and monthly bills. Cash in the bank can sometimes give a false sense of security, whereas monthly accounts will make it easy to identify problems or gaps in funding quickly, so that you can look for external funding or reduce costs before the problem becomes critical
6. Can be used to monitor working capital-It is easy to see how much cash you have in the bank from month to month, but slightly more tricky to monitor how much your customers owe you, how much you owe creditors, and of the monthly movements in those figures. An increase in debtors, without an increase in turnover can be an early warning sign that customers are taking longer to pay, and that you need to invest some time in chasing in payments.
7. Helps motivate and focus managers or staff that they are shared with-It can sometimes be helpful to share accounts with key members of staff, so that they can easily see the reason why they need to reduce costs, increase sale etc. Accounts can be a nice visual aid to focus performance, and can also be split into specific areas or ‘profit centers’ if you only want to show staff particular areas of the business
8. Avoids big surprises at year end –Usually business owners will have a good idea of how much they have sold during the year, and a grasp of regular costs, however it can be difficult to monitor varying margins, exceptional costs, one-off projects and anything else out of the norm. It can also be difficult to factor in accounting concepts such as accruals and depreciation. This can often mean that the year end results are far from expectations. If a business has made an unexpected loss it can cause a nasty shock, if the business has performed much better than expected it could result in an un-planned for corporation tax bill. It is also worth noting that failure to keep adequate accounting records, leading to an incorrect tax return can lead to a fine of up to £3000
9. Helps to identify seasonal differences-Some types of company will sell much more at certain times of the year, and so need to plan ahead. Monthly accounts allow you to track and analyze every individual month, so that you can clearly see the impact of this and better plan for the next year.
10. Helps to plan dividend payments and other remuneration –Some business owners prefer to take their earnings in dividends rather than salary; however dividends can only be taken when a company has distributable reserves. For less established or less profitable companies this will need careful monitoring, to ensure too many dividends are not taken through the year.