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It is important to allocate your overheads correctly if you are doing phased accounts. For example, some overheads such as rent, rates, insurance, subscriptions, IT support contracts or maintenance services, are charged annually or quarterly in advance. In your phased accounts, it is important to allocate them equally across the whole year or quarter otherwise total administration costs for each month will not make much sense. The same goes for bulk orders such as printing and stationery or one-off costs such as a new brochure. You should allocate these across the whole period over which they are expected to last rather than just put them in whatever month you happen to be invoiced for them. You should keep a sense of materiality here though. If the figures involved are fairly small, it may be more trouble than it is worth to allocate them so precisely.

Accruals and prepayments are another thing to watch out for. These are always (or should be) calculated at the year end for your statutory accounts, but are not so often considered for management accounts. Yet they can make an important difference to the monthly figures. For example, if you know that a big legal bill is looming for work your solicitor has done over the last few months, you should not wait until the invoice is received before putting it in your management accounts. Accrue for the work done in each month so that the whole bill can be correctly allocated. Otherwise the profit for the preceding months will be too high and the profit for the month you are finally invoiced will be too low. In that case, it would be pointless trying to compare one month with the next.

Re-charges are a common pitfall in phased management accounts. Often a business will incur costs on behalf of a client but not re-charge them until much later. The costs end up going in one month and the invoice goes in another. This will distort the monthly results. You should always try to match associated costs and revenues irrespective of which months they are invoiced in, otherwise the monthly totals for sales, expenses and profits will not be comparable. With phased accounts, the aim is always to achieve comparability.

Finance costs such as loan interest or lease payments should be accrued over the whole period they relate to. These can be easily overlooked as they are often charged months in arrears. The same goes for interest receivable on bonds and deposits or unrealised gains (and losses) on investments and foreign currencies. It is best to keep track of these items as you go along so that monthly profit reflects all corporate activities.

Large one-off costs should be shown separately from normal recurring expenses in the management accounts. Examples include redundancy payments, legal and consultancy bills and maintenance work. There should always be a sub-total in your management accounts for "regular" profit before these additional items are taken into account. This will enable you to track the underlying profitability of the business whilst not forgetting that the one-off costs hit the bottom line too. It may also be a good idea to phase large irregular costs like that over the whole year so they do not unduly affect some months more than others. Do not forget your notional costs such as depreciation of fixed assets or amortisation of goodwill. These affect profit too even though there is no outgoing cash payment (at least not since the original transaction). Again, it may be expedient to have a sub-total showing profit before notional costs so that there is some indication of what may be thought of as "cash" profit.

Finally, you should accrue for corporation tax as you go along at the prevailing rate. Many an owner-manager has rubbed his hands in glee at the sight of a healthy set of management accounts and declared dividends on the strength of bottom line profits, only to forget that the company still has to pay tax on them!

Acumen Accounting
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 3669 5270 Mobile: 07813 582890 E-mail:

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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