Your financial accounts are the final verdict on a year’s hard endeavour. They weigh up the difference between income and expenditure, and are supposed to inform you about how much you have made and how much you are worth. However, when following tax and accounting principles, annual figures can often hide a multitude of detail that is crucial to your business. If you need more clarity and insight into business performance then producing regular management accounts is worth considering.
What are management accounts?
They are solely for internal use, prepared in a timely manner, and detail gross margins for each enterprise as well as your profit & loss (P&L) and balance sheet. You can include estimates, analysis, data for interpretation and interrogation, prior year comparisons, averages – anything that makes the data more relevant for decision making within your business. They may be completed monthly or quarterly, but often are crucial in maintaining good financial control of a business; where margins are tight this is essential.
Statutory accounts often do not go into as much detail as management accounts, but are signed off by certified accountants and are seen as the “Formal” data that is widely accepted by banks and lending institutions. In most cases, they are prepared externally, many months after the year-end, with the sole purpose of calculating any tax refund or liability due.
Whilst there are differences in the presentation of each set of accounts, the input is often similar. Both should be reconciled to a bank to ensure completeness, and they should include all business income and expenditure, assets and liabilities.
There may be differences when it comes to depreciation rates applied, values placed on stock and accounting adjustments. This is because the accounting standards, and policies applied to statutory accounts, may not make the most sense when looking into figures to arrive at a sensible business decision. An example of this would be the valuation of livestock. Statutory accounts often use the Herd Account Basis, which prevents a farmer paying tax on any temporary fluctuations in herd size. Management accounts, however, will value the livestock at market values dependant on the age of the animals.
Another distinction between the two is that management accounts are produced with greater frequency than statutory accounts, to give a regular indication of business health.
Whilst every business, by law, must prepare tax accounts, management accounts are optional. It is important to remember, however, that they come with huge advantages, including up to date information, cash flow projections at your fingertips, monitoring of returns and efficiency, VAT return completion at the point of entry to avoid duplication, benchmarking information, cost analysis and comparison, “What If analysis” and information that actually represents your business endeavours.
So, in conclusion, although producing statutory accounts is obligatory, they do not provide the immediacy or detail that management accounts supply. For most complex businesses, these accounts are a vital tool for monitoring, planning and building success. After all, whilst what you need may be compulsory by law, it is often what you want that provides the information to successfully maintain & grow your business efficiently.
If you’re looking for further guidance on your business accounts, get in touch with the Farm Finance Consultancy team. We have comparative information to help with your business decision making.