Do small limited companies need management accounts?

A small company can use management accounts to check profit, money owed by customers, upcoming bills and the cash available for its plans. The reports can be straightforward: what matters is whether they answer your questions using current, checked records.

There is no turnover threshold at which management accounts become the right choice. A useful starting point is to list the decisions you make during the year and agree which figures you need before making them.

What changes as a business grows?

Hiring someone, buying equipment or taking on a larger contract changes both costs and payment dates. A profitable piece of work may need cash for wages and materials before your customer pays.

Your bank balance also includes money you may need for tax and other bills. Reports should allow for Corporation Tax, VAT and payroll liabilities, including Pay As You Earn (PAYE), National Insurance contributions and pensions where applicable. A payment schedule should use your company's actual due dates. Dividend decisions require sufficient distributable profits after tax as well as a check on cash.

Annual accounts give you a full-year record. Management reports and cash forecasts add information for the decisions between year-ends, with actual results kept separate from assumptions about the coming months.

When regular reporting becomes useful

Start with the decisions you want to discuss with your accountant:

• -How much should you put aside for tax? A current profit figure and a full-year forecast help your accountant estimate Corporation Tax, allowing for tax adjustments and the company's circumstances.
• -Can you afford another employee? Review the full employment cost, expected sales and payment dates. A cash forecast can test whether you can cover wages if a customer pays later than expected.
• -Which work earns the margin you expected? Agree how sales and direct costs will be recorded by project, product or service. Compare the results before changing prices or taking on similar work.
• -Can the company pay a dividend? Check accumulated distributable profits after tax, previous dividends and any losses. Record money owed to or by a director separately in the director's loan account.
• -Will customers pay before the bills fall due? Compare expected receipts with supplier payments, wages and tax. Review overdue invoices individually and update the forecast as payment dates change.

What should you check in the figures?

A report needs accurate records and a clear explanation of its assumptions. These checks are useful when reviewing it:

• -Tax estimates reflect your circumstances. Corporation Tax Marginal Relief can apply between the small-profits and main-rate limits. The limits depend on the accounting period and associated companies. A 26.5% marginal rate in the ordinary band calculation describes tax on an additional pound of profit, not the average rate on all profits.
• -Dividends and loans are recorded correctly. A dividend paid without sufficient distributable profits needs review; it does not automatically become a director's loan. If the company has made a loan, separate tax and reporting rules may apply.
• -Income and costs belong to the period shown. Missing supplier bills, annual subscriptions charged entirely to one month or unrecorded work can distort the result. Ask which adjustments have been made and which figures remain provisional.
• -The forecast explains what could change. Expected sales and collection dates should be stated. Test the effect of a quieter month or a late payment before committing to a new expense.

With our management accounts service, we agree the reports and review dates around the questions you want to answer.

Are they only for large companies?

Small companies can use a concise set of reports covering profit and loss, the balance sheet, cash and tax estimates. The detail should reflect how the business operates.

For example, a company employing staff may want to compare employment costs with sales and check cash ahead of payday. A project-based business may need a breakdown of costs and profit for each contract.

A construction company may also need to track Construction Industry Scheme (CIS) deductions and contract retentions. Turnover alone does not tell you which reports will be useful.

How do you know if you are ready?

Regular reporting is worth discussing if you find yourself asking any of these questions:

• -"How much Corporation Tax will I owe this year?"
• -"Can I afford to take this dividend, or will it create a problem?"
• -"The bank balance feels tight, but the business is supposed to be profitable?"
• -"Should I hire now, or wait until after year-end?"
• -"Am I making money on this type of work?"

Management accounts provide figures for these discussions. Forecasts and tax estimates may also be needed, depending on the decision, and should be identified separately from actual results.

As limited company accountants, we help directors introduce reporting at a level suited to their current stage, and scale it as the business grows.