Following the end of each financial year, every limited company must submit their Annual Accounts to Companies House and HMRC as part of their Company Tax Return.
This statutory requirement is not just another task to cross off your to-do list but a valuable time to take stock of your finances and small business.
But what if you needed to make some important business decision today?
Waiting until year-end to review your accounts doesn't help you right now...
That's where Monthly Management Accounts come in.
What are management accounts?
Management accounts are a set of financial reports usually produced monthly that include the core figures needed to make sound financial decisions. A standard set of reports includes a balance sheet, a cash flow statement and your income and expenditure statement.
Depending on the type of business you operate, you can expand on this to include other KPIs that are valuable to you in additional reports.
You can prepare your management accounts on a different time basis too, either quarterly, weekly or fortnight if it suits your needs. There are no deadlines to meet as these reports are solely for internal management use and not a statutory obligation.
For example, an early-stage tech startup might also want to look at their Retention Rate, Customer Acquisition Costs, Burn Rate or Active Users. For other important startup metrics that can shed light on the health of your business see here.
Management accounts allow small business owners and startups to understand how their business is doing at any given point in time by providing timely, accurate and meaningful data. They can give you a realistic picture of where your business is currently standing.
Management accounts vs statutory accounts
The main difference between Management Accounts and Statutory Accounts is that Statutory Accounts are a mandatory requirement for all limited companies. You must submit them to HMRC at the end of each financial year.
They are prepared only once per year and follow a generic format to make it easy for HMRC and shareholders to understand.
The reports to be included are a Balance Sheet and a Profit and Loss statement following either IFRS Standards or the New UK GAAP. Depending on the size of your company, a Directors' report and Auditor's report may also be required.
Micro-entities, small and dormant companies may not need to submit full accounts and can instead file simpler ('abridged') accounts. See here if your company qualifies or simply ask us and we will review your situation in detail.
Management accounts do not follow any set format and can be prepared any way you like and as often as you need them.
Statutory accounts give you an overview of your finances once a year and the exact end-result because all the information is adjusted for tax purposes.
Management accounts on the other hand provide a more in-depth analysis of your figures and offer a greater level of information needed for day-to-day management.
Management accounts can save you time
If you find preparing your year-end accounts is already time-consuming enough, the idea of doing it on a monthly basis can feel like an added burden.
However, the goal is here is to be proactive as opposed to reactive. Management accounts and help you identify problems in your figures early on and deal with them immediately as opposed to getting a bad surprise come year-end when deadlines are looming over your head.
You will save more time by doing a little each month than trying to figure out everything last minute and try to put out fires. This leads us to our next point.
Management accounts can help you reduce costs
Identifying problems early on can bring significant savings by not letting the situation get out of control.
One such problem that affects all small businesses is rising costs. Operations, inventory, technology and staff are common ones.
As a business director, you always want to know where the company money is being spent. Management accounts and a thorough cost analysis can help you quickly point out irregularities beyond just total costs so you can quickly address them.
Management accounts can help prevent fraud
One of the rising forms of business fraud in the UK is invoice fraud. According to a recent survey by UK Finance, more than 4 in 10 businesses are unaware of the risks and all sizes of firms are affected.
The scam takes places when fraudsters pose as regular suppliers and trick firms into transferring them money.
A regular review of your financial performance can reveal malpractices and detect fraud early on because you won't be waiting until the end of the year to review your accounts.
Management accounts can improve your cash flow
Having sufficient capital available is crucial to the viability of your small business and knowing your upcoming business expenses and what will go out of your account in the coming weeks is just as important.
By looking at your cash flow report as part of your management accounts you will know exactly what's your current cash position so you can plan ahead and avoid cash flow crisis down the road.
A good rule of thumb is to save up three to six months' worth of funds available to cover immediate obligations like rent, inventory, supplier bills and short-term debts.
Management accounts can support financing
You're probably well aware by now how important it is to have sufficient capital and if you want to expand your business even more so.
If you're looking for financing to fund your growth, banks and potential investors will need reassurance you can cover your obligations and provide adequate returns.
They will want to look beyond just your year-end results and know you have your business under control on a daily basis. Having management accounts for each month can demonstrate you have a firm grasp on your business and that their money is in good hands.
Management accounts can help plan for growth
Management accounts can be an important asset to your business by providing you with key information to plan your growth and expansion. Knowing only at the end of the year that you missed your sales target is not as helpful as knowing you're behind mid-year.
Management accounts can help you identify quickly sales trends so you can have better information and make the necessary adjustments to your strategy.
Ideally, you would want to break down your sales by service, product or category if you carry a lot of inventory so you can what's working and what's not.
Without objective data as a small business owner, it's impossible to make informed decisions.
Management accounts help you stay informed and in control
Ultimately management accounts should be a staple in your small business arsenal because it provides you with a wealth of information about your company and knowledge is power.
Having the right information gives you the control needed to make the difficult decision in bad times and navigate the growing pains in good times.
Whether it's cost control, time management, cash flow, growth, financing, planning and beyond. Management accounts can play a very important role by giving you the edge needed in managing your business day-to-day.
If you'd like to find out how management accounts could help your small business contact us today to discuss your situation with one of our Management Accountants in London or request a quote here to start the conversation
