Should you care what accounts are prepared for your business?
And how to make the most of them.
If you’re like most small business owners you’re simply glad to avoid the penalty for filing the annual accounts late and just have it all submitted in time.
Have you ever considered that setting up your accounts correctly could help you make better decisions in your business and earn more income? Sounds mysterious?
It probably is at first.
But, I can assure you there is value to be added to your business by analysing your business’s financial data.
All it takes is a bit more granularity in approach and thinking about your business processes.
Because you know what, the reporting body called Financial Reporting Council actually wants people, users of the accounts to make decisions based on the information included in those very accounts.
But, realistically, would you? Would you make a decision with regards to your business months after your company’s accounting year ended? And…you’ve recently landed a few big clients…but that’s not captured in the accounts…
How will I help you prepare your meaningful accounts?
In this blog, I will guide you through questions into thinking about your accounts in more manageable chunks that can help you make decisions for your business if provided a bit timelier.
When entering the small businesses scene, I was shocked to learn that vast majority of businesses not only don’t do monthly accounts, their accountant most of the time does not help them with planning and they only see their accountant for yearly submissions, nearly 9 months after the accounting year has ended. But, let’s think about your business…
Has your accountant actually prepared the profit and loss statement for your sign off?
OR like most micro businesses you only have a view of the balance sheet with the mention of the profits and tax liability for the year?
Chances are that if your company qualifies as a micro-entity you won’t even see the profit and loss for your company…
But if you are lucky enough to be in possession of the profit and loss statement, is it actually useful?
Business owners tend to care about revenues, don’t you?
Is the level of Revenues all that you can know from your company’s annual accounts (if at all)?
And does the number in the heading ‘Revenue’ aid you in thinking about income streams and profitable clients or products?
Do you have a system in place to track revenues and expenditures in relation to the client, product, location and time of sale?
If you are a digital agency, for instance, do you know how profitable your clients are?
OR are they actually incurring you a loss and it’s that one big contract that made you a significant profit due to high revenues and relatively low additional commitment of resources towards it (for those interested this would be referred to as relevant costs)?
How do you know where this money is mainly coming from? And what this money was really spent on and when?
The final annual accounts summarise a lot of data under the costs headings such as “Cost of Sales” or “Selling and Distribution”
Cost of Sales number, especially in manufacturing organisations, can capture plenty of important data such as the cost of raw materials, cost of storage, workforce, cost of purchases, and even the cost of rent for the warehouse where the goods are stored.
So, if you have a number for the cost of sales, ‘take it apart’ and check what it really comprises of and what it is that you spend money on.
The same goes for other headings in the income statement.
Different data is hidden under the heading ‘Selling and Distribution’ for a transport company, here you would be thinking fuel, vehicle insurance, toll charges. Whereas for an IT business, you would most likely see costs for website marketing, online advertising and selling.
What about the heading “Administrative expenses”?
It’s helpful to know where the money goes, is it on office salaries or business insurance? Or maybe it’s the wear and tear of equipment (depreciation of computers) and not actual expenditure?
The more you know about the numbers behind the numbers (literally), the more you know about your company’s finances. Thus, you can much more easily establish where there is potential to save money and increase revenues.
As for the finance costs…
Do you have a loan and/or incur finance charges? Are these only related to the repayments?
Or do you sell goods and incur commission from your credit card provider, would you still categorise these as finance charges with finance interest or product costs? You can actually do both depending on the analysis type.
You can highlight these costs as a percentage/ratio of your overall finance charges and also as a percentage of services/products sold.
There is also a case of exceptional items.
For big companies, these would be for instance in relation to company restructuring or business disposal.
For a small business, exceptional items could also be in relation to selling that piece of hardware that actually got outdated really quickly and the company made a loss but it’s only in that one year as after that a lease was taken on the most up to date equipment.
It’s important to differentiate between the one-off events and ‘business as usual’ to be able to make the right decisions.
Management accounts are supposed to serve you in managing your business and not the other way round. Of course, you do need to reflect the fact of the matter and nothing but the true view.
If you get the breakdown of transactions – categorised by what’s useful and informative for your type of business as well as what fits within your sector, you’re essentially creating management accounts that will help you in the decision-making process.
Do you want to be like the big successful companies?
If I may compare this to cooking a meal…if you leave it unattended in the oven, it’s risky as the food may get burnt and you may not reach the desired end result – your tasty meal.
Hence, why would you leave your business success to chance?
If you decide to keep accurate accounting records and know exactly what comprises the balances in the accounts, it’s called management accounts, all successful big businesses do them, at least every month.
Take action today. Review your accounts. Increase your income.
This is ‘Part 1 – Income statement’ of the series: How to prepare monthly management accounts
Still coming up in this series: ‘Part 2 – Balance sheet’ and ‘Part 3 – Cash flow statement’