Year-end accounts and management accounts are extremely important tools for any recruitment director, as they tell the story of the company’s performance and enable owners to make informed decisions about the future of the business.
These accounts are usually made up of two key documents: the balance sheet and the profit and loss sheet.
However, many recruitment directors don’t fully understand the numbers shown and often focus solely on the profit and loss sheet to check profitability while ignoring the balance sheet, not realising that it’s actually the most important page in the accounts.
The profit and loss sheet shows the amount of sales generated and lists all overheads, but it resets at the end of the financial year. It only tells the story of the company during that specific period.
The balance sheet, on the other hand, is the complete story of the company from the very beginning. It provides a snapshot of the balances due in and out as of the accounts’ date. This allows a director to see how much available cash they have to work with, and whether there is any retained profit that can be used for future investments or taken as dividends.
Here are the headline titles often shown on a balance sheet and their meanings:
FIXED ASSETS
These are the tangible items the company owns, which could be sold if the business were to close, with the proceeds added to the company’s cash reserves. These include computers, monitors, desks, chairs, furniture, printers, and similar equipment. However, these items lose value over time, so an accountant will depreciate them gradually until they are either worthless or sold.
CURRENT ASSETS
This section covers money that is currently in the company or due to be received. It typically includes:
- Trade Debtors – Money owed to the company based on invoices outstanding
- Other Debtors – Sales invoices relating to the accounting period that will be raised in the following month (e.g. November invoices raised in December).
- Prepayments – Costs paid in advance, such as insurance, job boards, or subscriptions, which relate to future months and will appear in the profit and loss account when they fall due.
- Bank Accounts – Funds currently held in company bank accounts, including current, savings, and foreign currency accounts. These balances should reconcile with bank statements.
LIABILITIES
This section shows costs that are due to be paid out. It may include:
- Trade Creditors – Money owed to suppliers or contractors for invoices received.
- Other Creditors – Purchase invoices relating to the accounting period but received in the following month (e.g. a November invoice received in December).
- Accruals – Costs incurred (or that should have been incurred) where no invoice has yet been received, such as Class 1A National Insurance or future commissions.
- HMRC Liabilities – Current amounts owed to HMRC for PAYE, VAT, and Corporation Tax.
- Invoice Finance – If the company uses invoice financing, this shows the amount borrowed from the finance provider, which should reconcile with their end-of-month statement.
- Directors’ Loans – The amount owed to or by directors that hasn’t been taken as salary or dividends. This may include reimbursable business expenses paid personally, unpaid declared salaries, or funds loaned to or borrowed from the company. As there are specific rules governing Directors’ Loans, it’s advisable to seek guidance from an accountant.
NET ASSETS
This figure represents what would be left in the company after selling the fixed assets, collecting all current assets, and paying all liabilities.
- A positive balance means the company is solvent and funds can be taken as dividends, retained for future use, or reinvested in staff, equipment, or technology.
- A negative balance may indicate insolvency, potentially due to overspending or excessive withdrawals. In this case, dividends cannot be taken, as there is no available profit.
At MAYACHI, we use management accounts in regular meetings with our clients. Reviewing the balance sheet with directors helps them understand their company’s financial story and plan for upcoming cash flow and expenditure. MAYACHI also works closely with accountants to ensure that balance sheets accurately reflect the company’s true financial position , so there are no unpleasant surprises when it’s time to prepare the final statutory accounts.
