What's the point of Annual Accounts?

Companies have to submit Annual Accounts to Companies House. But I’ve found many business owners feel as if these accounts they submit offer very little value, seeing them purely as a task they have to do.

The main reason for this is that Annual Accounts are not designed with the business owner in mind. In fact, they are really for the benefit of others.

Who are Annual Accounts for?

As a company is a separate legal entity with the owners benefiting from limited liability, it’s reasonable that others might want to know a bit about it. Such as:

  • Suppliers wanting to know if the company can pay for its goods
  • Customers looking to see how well established a company is
  • Lenders wanting to assess credit-worthiness
  • Investors assessing the potential risk and opportunity

It’s important that these accounts are as objective as possible and there are various rules governing how Annual Accounts are prepared. This makes it easier for the accounts to be understood and compared with different companies.

But, what about the Company Owner?

Annual Accounts need to be submitted 9 months after the year end with the main focus being the Balance Sheet (what the company owns and owes at a certain time).

This isn’t so useful when running a company. After all, the business you are running today is probably a fair bit different to the one you were running last month.

Also, when you think about your company’s finances, you're probably more concerned about how much cash coming in and out over the next few weeks, rather than what the net assets were a year ago.

What about Management Accounts?

As with everything, it’s a matter of using the right tool for the right job.

While annual accounts are focused on helping those outside the organisation, management accounts tend to be produced regularly throughout the year and are for the company’s own use. They can include forecasts, non-financial information, really anything a company needs to keep itself on track.

While management accounts are not at all mandatory they can offer a lot of insights to a company. This is why most large organisations will employ many accountants for.

Both annual accounts and management accounts draw from the same financial information. So preparing management accounts throughout the year also helps to build up the annual accounts.

This takes a lot of the stress out of getting the annual accounts together, while also offering real value to the business owner.

After all, you’re going to have to produce some accounts, why not get some benefit out of it?