Statutory accounts

10 min

Small business owner: 5 best-practices to ace your statutory accounts

Most small business owners find it challenging to stay on top of the ever-changing regulations and best accounting practices since they're typically managing ten different hats. Don't worry though, here are 5 best-practices that will help you articulate your statutory accounts in a compelling way.

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We all know or will know the pain of doing the accounts for a small business. A lot of information that seems like an alphabet soup. This article covers 5 best-practices that can help you create reliable statutory accounts, saving you time and money.

What is preparing statutory accounts?

Statutory accounts are the financial statements that businesses are legally required to produce annually. They include a balance sheet and income statement, which show how much money comes into the business and how it's spent. These financial statements must be prepared according to government regulations, so they're also known as GAAP (Generally Accepted Accounting Principles).

Why are statutory accounts important?

The most obvious reason why small business owners should prepare statutory accounts is so they're ready when they need them — such as when applying for a loan or seeking investment capital. The other reason is so that investors can compare these statements against their own records of what has happened in the past (and plan for the future).

Who are statutory accounts used by?

Statutory accounts are essential to see how a business is doing financially. For small businesses CEOs, accountants and CFOs, it's important to keep the statutory accounts up-to-date and accurate. They are also used by creditors, shareholders and banks to assess the financial health of your business.

1/ Understand your business capital

To ace your statutory accounts, you must understand your business capital. Your business capital is the value of all your assets minus any liabilities. As a small business owner, it's important that you know how much money you have available for investment and spending and that you understand what drives changes in your company's financial health over time.

If there are fluctuations in the value of certain assets or liabilities, this may indicate problems with cash flow or accounting errors. It can also give an indication about whether you're running a profitable venture or not - if all of your assets fall below their cost price then this isn't a good sign!

2/ Know how to best prepare your accounts

There are three main financial statements:

  1. Income statement (profit and loss account);

  2. Balance sheet;

  3. Cash flow statement.

The income statement

The income statement, also known as the profit and loss statement (P&L), is one of the most important documents in a company's financial statements. It shows the company's revenue, expenses and net profit over a period of time.

The first step towards getting your head around an income statement is by understanding what each line means. Here's everything you need to know about the different sections of an income statement:

  • Revenue: the money that your business has received from customers for goods or services supplied.

  • Cost of sales: the amount spent on buying raw materials, packaging, transport and other costs associated with producing your goods or services before they're sold.

  • Gross profit (or loss) shows how much money you made before deducting any expenses such as staff wages and rent/mortgage payments.

  • Operating expenses (or operating income): all of your operating costs such as staff wages and rent/mortgage payments as well as all other costs associated with running your business, such as business rates and insurance premiums.

The balance sheet

The balance sheet is an overview of your company's financial worth at a specific point in time. It covers all assets and liabilities, both current and long term. It's one of the most important financial reports for any business because it shows what resources are available to support future growth or expansion.

The balance sheet's equation is as follows: assets = liabilities + equity. As a small business owner, it is critical that you know the value of your assets, liabilities and equity in order to calculate your balance sheet:

  • Assets are anything that has value to your business. Assets include cash and investments, inventory, equipment and furniture.

  • Liabilities are debts owed by your business. Liabilities include accounts payable, loans and taxes due.

  • Equity is the difference between your assets and liabilities. Equity includes retained earnings (the amount left over after paying off expenses), common stock (which is sold to investors) and retained earnings (the amount left over after paying off expenses).

You can use the following steps to prepare and calculate your balance sheet:

  1. Prepare a list of all assets, liabilities and owner's equity accounts.

  2. Classify each item on the list as a current asset or liability or long-term asset or liability:

    1. Current assets include cash on hand and anything expected to be converted into cash within one year (e.g., inventory).

    2. Current liabilities include anything due within one year (e.g., accounts payable).

    3. Long-term assets include anything expected to last more than one year (e.g., buildings).

    4. Long-term liabilities include anything due more than one year from now (e.g., mortgages).

  3. Calculate how much has been invested by owners into the business by subtracting total liabilities from total assets and then dividing that result by the number of shares outstanding to get owner's equity per share.

The Cash flow statement

The cash flow statement shows the net cash generated or used by a business over a period of time. Cash flow statements can be prepared for a period as short as one month or as long as 12 months. The purpose of this statement is to provide information about the company's ability to generate or use cash.

You should prepare your cash flow statement according to the below steps:

  1. Calculate your net income (profit) by subtracting all expenses from revenues, including all costs such as depreciation, amortization, taxes and interest payments.

  2. Calculate your changes in working capital that occurred during the year. This includes accounts receivable and inventory as well as accounts payable and other current liabilities such as taxes payable.

A good cash flow statement will give you answers to questions like:

  • How much money do we need to generate sales?

  • What are our most profitable products or services?

  • Should we be investing in new equipment or marketing initiatives?

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3/ Be consistent in how you record invoices and receipts

Recording all transactions in one place makes it easier for you to keep track of your income and expenses. If you use multiple apps for invoicing and recording expenses, make sure all transactions are recorded in the same place so that they can be imported into your accounting software at the end of each month.

If you find yourself struggling with this, then consider using an invoice collection tool to help automate this process. These programs can help keep your records up-to-date and accurate by doing things like:

  • Automatically retrieving your invoices by email

  • Perform bulking imports of your invoices from your computer or smartphone

  • Collecting all your invoices from supplier websites using extracting connectors.

  • Use the OCR technology to automatically extract the data and convert it to electronic format.

4/ Let the Cloud do the heavy-lifting

If you're using an accounting system, make sure it has built-in tools to help you with your statutory accounts and that it can handle VAT returns for multiple countries.

Use a cloud-based system with both desktop and mobile apps and automate as much as possible. Then let the software do the heavy-lifting by automating tasks such as calculating depreciation or creating journal entries based on last year's transactions. This will save you time and energy while ensuring that everything is done correctly and on time.

5/ Take a leaf from Libeo’s book

Libeo is a fully integrated and automated business-to-business payments platform, bridging the gap between invoices, payments, reconciliation and accounting.

When it comes to invoicing and payments, Libeo can help you achieve this by automating the entire process. By keeping track of all your financial transactions and automatically updating your balance sheet every time a payment comes in or goes out, Libeo makes the production of statutory accounts easy, fast and secure. Icing on the cake: validation workflow and shareable approval processes.

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FAQ

What are statutory accounts vs management accounts?

In the UK, there are several different types of accounts: statutory and management accounts.

  • Statutory accounts are the official set of accounts that you have to use if you have a limited company. They're submitted by WebFiling to Companies House. They're used for reporting on your business financial performance to HMRC and other interested parties.

  • Management accounts are internal reports to help managers make decisions about how the business is running. They may be presented in an annual report for shareholders, but they can also be used to plan future activities and spot potential problems before they become real issues.

How to file the income tax form for a limited company?

Your corporation tax forms should be filled using Company Tax Return for Corporation Tax with HM Revenue and Customs (HMRC).

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