I have spoken to a number of owners of small businesses whose eyes glaze over at the thought of looking at a set of accounts. Conversely (perhaps sadly) the eyes of accountants often light up at the sight of a set of accounts.

Well accounts may be boring but ignore them at your peril!

Accounts not only set out information about the financial well being of your company, the lack of accounts (or lack of quality) can send out the wrong signals to stakeholders:

  • I recall a conversation with a bank manager friend. He said he was going to see a customer about an overdraft renewal and the last accounts he had were 15 months old “what can I do?” he said. Many people feel that in recent times the banks have been over harsh in their lending decisions, but in this situation I can only sympathise.
  • In a recent conversation I had with a CEO of a multinational business, he described the importance of having a secure supply chain. He mentioned that they had three potential suppliers for a key component, but now only have two as one couldn’t provide accounts. He said “we can’t risk them going under”.
  • Credit reference agencies use accounts to assess the financial viability of businesses and this can influence the amount of credit you receive from suppliers.

For limited companies (or LLPs) there are potentially two types of accounts:

  • Statutory accounts are the annual accounts required by law that have to be filed at Companies House and are drawn up in line with legal and other requirements.
  • Management accounts are not required by law but many companies use them to help them manage the business. They are also often required as a condition of business funding.

Some information about statutory accounts:

  • Companies that are classed as “small” under company law are entitled to file abbreviated accounts at Companies House, these essentially comprise a balance sheet with no information about profitability. Whilst this gives the advantage of privacy, it does mean that the information that credit reference agencies have is limited – so if credit from suppliers is important to your business it may be beneficial to file full accounts (which have to be prepared even if abbreviated accounts are filed).
  • Most small companies file unaudited accounts (despite many business owners sometimes describing them as audited). An audit does come at an extra cost, but it gives additional confidence to stakeholders. An audit is not usually a root and branch health check on all aspects of a company’s finances, it is more a check on the main items in the accounts at a particular point time. However it should provide owners with some confidence that things are on track and perhaps feedback where improvements can be made; also, demonstrating to an outsider that things are correct is an excellent discipline for staff.
  • Dealing with the accounts around the Companies House filing deadline (for private companies normally 9 months after the year-end) means that you are dealing with out of date information, which is a bind for all concerned. More importantly the timeliness of your accounts can influence the view of stakeholders.

Statutory accounts are required by law and as such can be viewed as a bureaucratic hassle. However if approached positively they can be part of your business tool kit; on the other hand dealing with them as an afterthought can sometimes put a spanner in the works!

Statutory accounts are about accountability, it is part of the deal when you have limited liability. Management accounts should be about your business – in my next blog I will talk about how they can become an essential part of your business toolkit that helps you really drive the business forward and make better decisions. It will also provide some tips that will hopefully help remove that glazed expression!