Every limited company must file a set of accounts with Companies House following the end of each financial year. That is a statutory requirement, and is seen by some as a necessary evil in exchange for some of the benefits of being a limited company entity. However, far from just being a box ticking exercise, a set of accounts can provide you with valuable information about your business and its performance, allowing you to make better decisions and strategically plan for the future.
The benefits of Accounts can however be limited, if you only see them once a year. Many businesses therefore produce monthly management accounts. For smaller firms looking to control spending, this may seem like adding an unnecessary cost, but we would contend that the benefits nearly always outweigh the expense. Here (in no particular order) are our top ten reasons why:
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 the reality is very different from expectations though, and the difficult part is spotting where those differences stem from. Budgets and forecasts can easily be integrated into management accounts, providing a visual aid to easily see the causes of any variances. Our management accounts packs are specifically designed to be very visual, with graphs and charts to easily see where you are against budgets and forecasts.
Help to Control Costs
A monthly set of accounts makes it very easy to compare costs month to month, and to expectations or budgets for the month or year to date. Often savings can be found by analysing costs in more detail, and promptly. It allows you to pick up on small variations against budget, which over the course of a year would add up to a significant difference. It also helps to set out all your various outgoings/costs in a list that is easy to review, rather than trying to do that in your head. This situation has been even more apparent in 2020 where all businesses’ are trying to review their costs, and those with management accounts have a very easy place to start.
Can be Used to Obtain Finance / Extent Credit
If you are looking to raise finance from a bank or investor, continue or increase an overdraft, 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 if you are using a set of accounts that were produced 6 months or more ago. This is especially true if the business performance has changed significantly since the last financial year end, or in the present situation, where the whole world has changed significantly since the previous year!
‘What Gets Measured, Gets Done’
It’s a bit of a cliché, but it is true! Relying on annual accounts or data is not very useful in measuring realtime, or within a useful timeframe, what is going on in your business. You can use management accounts to help set measures or targets that would be beneficial to your particular business, and then use the monthly reports to measure where you are against those. That way, you are using the data to refine what you are doing, change tact completely, choose what you should be doing more of, less of, or even not doing at all!
Helps with Cash planning
Remember cash is not the same as profit. For example, some firms may collect a payment to account from their clients up front, but obtain credit from suppliers, or have chosen to defer payment of VAT. In the gap between receiving cash up front from clients, and paying suppliers or deferred VAT, 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
Next week 6-10!
Gregor Angus, Senior Business Development Manager