Think about that question for a second…do you know how to read your own company accounts? Any company, limited or LLP, that is registered at Companies House, must present a set of company accounts each year within 9 months of their year-end. These accounts tell the story of the year gone by and the financial stability of the company. A company may also choose to have management accounts prepared by their accountants and/or internal accounts teams periodically (often monthly or quarterly) so that the Directors and Shareholders know the current performance of the business and potentially make decisions to enhance the company’s growth.
Many recruitment directors have come from a background where they have worked previously as a very successful recruiter for another agency and have decided to use that knowledge to start their own recruitment agency. As this is often the Directors’ first time running their own company, they may be unsure of what their accounts mean or how to read them. As a result, they may make mistakes along the way unless they are given guidance from an accountant or finance professional.
DO YOU KNOW HOW TO READ YOUR OWN COMPANY ACCOUNTS?
Below is a guide to the two main pages of a set of company accounts to help understand what they actually mean: –
THE BIG ONE – THE BALANCE SHEET
The Balance Sheet is one of the most important pages within the accounts and shows the amount of profit remaining in the company was it to fail/close on the date of the accounts. This is calculated by selling the value of the Fixed Assets (computer and office equipment), collecting in your current assets (bank account balances and collecting in funds from clients) and paying off any current liabilities (paying suppliers, paying HMRC, repaying loans/invoice finance). If the balance at the bottom is negative, then the agency is trading insolvently but if the balance at the bottom if positive then there are retained earnings remaining within the company.
THE STORY OF YOUR BUSINESS – PROFIT & LOSS
The Profit & Loss sheet shows the story of how the company has fared over the last period (month/quarter/annum) and details (without VAT) the profit generated during that time. This is calculated by showing the Sales Turnover (the amount invoiced to the client for permanent and/or contract/temporary placements) minus the Cost of Sales (the amount paid to the candidates (contract/temporary placements only) to get the Gross Profit (some staff costs may also be deducted such as commissions). The overheads are then listed (such as IT, marketing, travel, entertainment, accountancy fees, factoring costs, etc) and these are deducted from the Gross Profit to show the Net Profit. There may also be a deduction for corporation tax and the amount of dividends declared to show the remaining Net Profit
WHY UNDERSTANDING YOUR ACCOUNTS IS VITAL
Once a director understands their management accounts, they can make better decisions on when to take on new staff, understand their cash flow and how much money they can take from their business. These can also help to project their future profitability and give a guide to the current value of the company.
“BUT WAIT, I NEED HELP GETTING STARTED!”
Knowing where to start can be a daunting task. Relax, we can help.
MAYACHI Ltd uses management accounts as a tool to help recruitment directors understand their financials of where they have been and plan where they want their business to go. We provide training to recruitment directors to understand these reports and how best to use them, especially with their growth plans. All you need to do is reach out to us and we’ll jump on a call.
