Management accounts or filed accounts: what each tells a lender

Every client review comes down to two sets of numbers. The statutory accounts are the ones filed at Companies House. The management accounts are the monthly figures the client prepares for itself and sends to you. They answer different questions, and treating one as if it were the other is a common way to be misled.

Filed accounts: checked, but late

A private company has nine months after its year end to file its accounts. So by the time they appear, the figures can be well over a year old. They describe a business as it was, not as it is.

What they do offer is a degree of independence. The directors have approved them. Many are prepared by an outside accountant. Larger companies must have them audited, so the audit report tells you whether an independent auditor was satisfied. Read that report before anything else: a qualified opinion, or a note on going concern, changes how you read every figure that follows.

But “filed” does not always mean “full”. Most small companies are exempt from audit. Many file a balance sheet without a profit and loss account, and micro-entities file even less. So the filed version may have no sales, no gross margin and no profit figure at all. The company still prepares full accounts for its shareholders and HMRC, so ask the client for them.

Use filed accounts for:

• net worth and its trend over several years;
• the shape of the balance sheet: what is owed to whom, and when;
• loans from directors, and charges registered against the company;
• a fixed point to reconcile everything else against.

Watch for: late filing, which is itself a warning sign. Also watch for a change of accountant or auditor, a change of year end, and accounts filed just before the deadline year after year.

Management accounts: timely, but unchecked

Management accounts are usually monthly, and nobody outside the business has checked them. They are only as good as the bookkeeping behind them. They are also the only up-to-date picture you have.

The usual weaknesses are predictable:

• Stock is often estimated rather than counted, so gross margin moves as the estimate does.
• Accruals and prepayments are often missing, so costs land in the month they are paid rather than the month they belong to.
• Depreciation, bonuses and tax may be left out until the year end, which makes monthly profit look better than it will end up.
• Debtors may include balances the year-end process would write off or provide against.

None of that makes them useless. It means reading them for direction and consistency rather than precision.

Use management accounts for:

• trading since the last year end: sales, margin and overheads, month by month;
• the debtor balance, to compare with the aged debt report you receive;
• cash, overdraft and creditor balances, including HMRC;
• early signs of the problems the filed accounts will confirm a year later.

Make them meet

The most useful test is to compare the two at the same date. Take the management accounts for the month of the year end and set them beside the statutory accounts for that year.

If profit in the management accounts was £180,000 and the filed accounts show £95,000, ask where the £85,000 went. Usually it is the year-end adjustments: a stock write-down, depreciation, bonuses, a bad debt. Sometimes it is something the monthly figures were hiding. Either way, it tells you how far to trust this year’s management accounts. The same gap is probably building again.

Do the same with the debtors. The sales ledger total in the management accounts should agree with the aged debt report for that month. The year-end debtors in the filed accounts should be close to both, after VAT and any provisions. A difference that nobody can explain is a question for the next review, not a footnote.

When the two disagree

A gap between management and filed accounts is not a reason to stop funding. It is a reason to understand the business better. Ask the client’s accountant, not just the client, what the year-end adjustments were and why. If the same adjustments come up every year, you can allow for them when you read the monthly figures. If they are new, or bigger than before, they tell you something has changed. A client that is reluctant to explain the gap is telling you something too.

What to ask for

• Full accounts, not just the filed abbreviation.
• Monthly management accounts with a balance sheet, not just a profit and loss page.
• The year-end management accounts alongside the statutory accounts, with the reconciling items explained.
• Who prepares the monthly figures, and whether stock is counted or estimated.

Filed accounts tell you where the business was. Management accounts tell you where it says it is. Your job is to judge how far apart those two are likely to be.