As a business owner, running your own business is as much about recording numbers and juggling admin as it is about running your business! There are annual returns, PAYE and VAT to generate as well. And to add to the mix, the law requires you to prepare and file accounting statements.
What’s the difference between financial and management accounting?
Financial accounts describe how your business has performed over the last year. This information is used by external bodies interested in knowing about your business: HMRC, any investors and your bank.
Management accounts are not legally required but are a useful tool to understand how your business is performing. They’re also vital for lenders and investors to gain an accurate picture of:
- how your business is performing now, and
- how it expects to perform in the future.
Financial Accounts
Financial accounts include two elements:
- Income Statement (Profit and Loss account): A summary of business transactions for the last 12 months, which shows whether the business made a profit or loss.
- Balance sheet: A snapshot of the business on a particular date. It shows the assets the company owns and financial liabilities. Essentially the balance sheet shows whether the company is solvent or not – does it have enough assets (including cash) to cover its liabilities?
We can assist you with the preparation of all your statutory financial accounts, including submission of the final documents to HMRC and Companies House.
Management Accounts
Management accounts are a bit different. They are a set of figures looking at areas of your business, and are specific to you and your business. There is no legal requirement to produce them, but many businesses do,monthly or quarterly.
Most business owners and managers use management accounts to see how their business has performed. This helps them make timely, sensible decisions based on accurate information. In the management accounts, there should be information on the following areas:
- Sales: The performance over the last month or quarter, product pricing and credit control (how much you are owed)
- Purchasing: How much your business has spent in the last period, how much stock it holds and what you owe
- Cash flow analysis: This examines whether enough cash is coming in to cover the business’s outgoings. Many businesses that fail simply run out of cash, despite having healthy sales
- Fixed assets: What your business owns, for example in equipment or vehicles
This information provides valuable analysis for the future. You can use your management accounts to look at your sales revenue, when it is due in, and which of your customers are likely to pay late. This is a powerful way to accurately predict your cash flow, giving you plenty of opportunity to arrange some temporary finance – if required.
With Xero, you get regular management accounting information and real-time access. So you always know exactly what position your business is in.