As a small business owner, running your own business often seems to be as much about recording numbers and juggling admin as it does about doing what you do best – running your business! There are annual returns, PAYE and VAT to generate as well, and to add to the mix you are required by law to prepare and file accounting statements.
What’s the difference between financial and management accounting?
Financial accounts are required by law and describe how your business has performed over the last year. This information will be used by external bodies that have an interest in knowing about your business, such as HMRC, any investors and your bank.
Management accounts are not required by the government but they are a very useful tool to help you to keep a handle on how your business is performing. They’re also considered vital by lenders and investors to provide an accurate picture of how your business is performing now and how it expects to perform in the future.
Financial accounts are typically made up of 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 business owns and financial liabilities. Essentially the balance sheet shows whether the business 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, leaving you or your accountant to submit the final documents with HMRC or Companies House.
Management accounts are a little 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 on a monthly or quarterly basis.
Most business owners and managers use management accounts to see how their business has been performing. 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 there is enough cash 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 should be used to provide useful 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 what your cash flow will be like in a few months’ time, giving you plenty of opportunity to arrange some temporary finance – if required.
We can provide you with regular management accounting information and real-time access so you always know exactly what position your business is in.