Why do I need to prepare annual accounts?

If you think about it, there really isn’t a good reason except tax collection. Not sure how many accountants would agree with me. The question that the accounting has to answer day to day is, am I making enough to keep doing what I am doing? This is more about cash than anything else. Nothing terribly complicated. Is there more cash coming in than is going out? You need this information on hand all of the time.

I say you need the information all the time, although as long as you get the feedback frequently, that should be fine. You cannot wait for your annual accounts.

I suppose there are a couple of measures that day-to-day should mean you are profitable. Firstly, do you make a decent margin on all the goods or services you sell? Second, is your bank balance at the end of the month higher than at the start? Now I know these are crude, but if more small businesses paid more attention to these metrics, they would all be doing better.

From my experience, there are people out there, doing well, whose DNA embodies these. They don’t wait for any accounts. Every deal must be good, other than the occasional one out of your control, and they want to see their cash increase. They may invest that cash, but it will be in saleable and preferably appreciating assets, such as property.

At the end of the year when we tell them the profit they have made, it should not be any great surprise, but they will hate the idea of paying any tax because they can use that money to better themselves to drive the business forward. Is this you?

We prepare monthly management accounts. I say we, but it is actually Helen and she also oversees all the financials and prepares all the analyses we need. We also have some pretty amazing spreadsheets that hook into our database and produce just about every metric we could possibly want. Well, you see, her eldest son is an actuary and a dab hand at spreadsheets and databases.

But, day to day, we concentrate on what cash needs to go out and so what cash needs to come in. We know we are making profits, but are they high enough to cover the outgoings? That is why we look at cash both before we have our management accounts and after. We (Helen) also project forward so there are no surprise cash depletion events.

Well, we are accountants after all. If we can’t run our own business efficiently, how can we advise anyone else? By the way, just in case you feel like having a look at our accounts at Companies House, you won’t find them. We have never filed our accounts at Companies House since we incorporated in 2004 and Companies House are quite happy with that state of affairs. We have shown a number of our clients who either are, or want to be, incorporated, how to follow our example.

Anyway, getting back to my point about the futility of preparing accounts, if you consider the life span of a business from inception to cessation and dispersal, that business over its lifetime will hopefully have made a surplus. That surplus will be represented in the cash left after everything has ceased and the assets are sold off.

It will be made up of the trading profits adjusted for the loss over time of using equipment and possibly a profit on buildings bought and then sold by the business i.e. profit and loss on disposal, of fixed asset, which is basically the depreciation if you spread it out over the life of the business.

So, if the cash at the end of the day is basically the accumulated profits, why get so worked up about producing annual accounts? If they are inefficient as a tool for running the business and are only there for the taxman, why not work out the tax on the cash flows?

The answer of course is that is exactly what HMRC are doing by putting so much emphasis now on cash accounting, not just for property businesses, but also for many small businesses. Have a look at the cash accounting provisions on the HMRC website.

All that a set of annual accounts is doing is carving up that lifetime surplus into short annual slices that make up your annual accounts. This is done with various rules and regulations that set out how to achieve that apportionment and what information must be disclosed. Many people make a good living out of administering all these rules, and checking they are being followed. No wonder so many people think finance is boring.

Anyway, I must go and work on some annual accounts.

 

Alan E Long

The Long Partnership

07770 738770

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