Shropshire tax specialist outlines advantages of management accounts

While many business owners believe that simply having statutory end-of-year annual accounts prepared to satisfy the demands of the taxman is going far enough, Steve Timmis, Director of Shrewsbury-based DJH Accountants, argues that by preparing and analysing accounts more frequently, firms can actually identify trends – both good and bad – and measure performance more accurately, putting them in a better position to regularly review its operations.

“Management accounts, which can be produced weekly, monthly, or quarterly, include balance sheets, cash flow forecasts and income statements, all the core components of a business’s day-to-day operations,” Steve explained. “Analysing such financial and statistical information in a timely fashion enables business owners to make informed decisions on the future of their firm and proactively tackle any possible issues head-on.”

Unlike annual accounts, which are a statutory requirement to comply with the law, there is no legal obligation for a business to deliver management accounts. Because of this, many smaller firms in particular fail to produce them, believing them to be unnecessary, time-consuming, and expensive. However, Steve argues that having up-to-date financial details available, and sharing them with key partners such as accountants, bank managers, and solicitors, can actually bring about real business benefits.

“Producing regular management accounts can help a business owner answer fundamental questions such as ‘how much money are we making?’, ‘where are we spending money?’, and ‘are we in a position to grow?’. They are also a vital tool to help a firm’s accountant tax plan more effectively. Rather than an accountant simply reviewing a business’s books after the year end when preparing year end accounts, by analysing monthly or quarterly management accounts, this can help to proactively plan ahead for a company’s Corporation Tax obligations, while also prompting the accountant to offer ways of reducing the Corporation Tax bill, where commercially appropriate.”

While the majority of the information provided in management accounts will be included in a company’s annual accounts, the fact they are only produced once a year – and often a considerable time after the period they refer to – means that businesses are unable to be proactive and make decisions in a prompt fashion.

Steve added: “Producing regular management accounts can also help a company build a stronger relationship with its bank. If a firm is looking to secure a loan or overdraft, they’ll actually have to produce regular management accounts to satisfy the lending requirements. But if they were to share such information voluntarily on a more regular basis, which rarely happens without prompting, then it enables the bank to get a better insight into a business, and helps to build up trust if financial assistance is needed further down the line.

“In such challenging economic circumstances as we currently face, businesses need all the tools in their armoury to control costs and cut out any waste. Utilising regular management accounts can help business owners streamline their activities, maximise their profit margins, and minimise their tax obligations – when all the advantages are added up, it’s clear they will save far more in the long run than they cost to produce.”