Do You Know How To Read Your Own Company Accounts?

Running a successful recruitment agency is not just about the sales and placements made but also about ensuring the business has enough cash-flow and is profitable.  We speak to many different size prospective recruitment agencies who are either receiving monthly, quarterly or annual figures (or nothing at all) and quite often they do not know what they mean or how their business is actually performing.  Quite often they will be looking at the bottom of the Profit & Loss sheet and be excited if they have made a profit and ignore them if they have made a loss.  However it is important to understand the worth of management accounts in order to grow and develop your agency into a successful one.

Management accounts can be used to monitor your sales growth, observe where you are over or under spending (so potential savings or controls can be made), make you aware of your HMRC Liabilities and see how much money you are due in and out of your business.  They are also important should you need to secure finance (as they are often required by banks/invoice finance companies), attract potential investors/buyers and also to make business decisions such as hiring new staff, moving to bigger premises or changing to a new IT system.

Management accounts are fairly simple to understand once you know what the figures mean. Below we have given you a guide on the two main sheets in standard management accounts you may be receiving:-

  • Balance Sheet – The Balance Sheet in a set of Accounts is a snap shot of the company up to the period end (either month end or year-end). This will show you that if you collect all of your money in and pay out everything you owe the figure at the bottom of the balance sheet on that date should be what you should be left with in your bank account.
    • Fixed Assets – Fixed Assets are items such as computer equipment, telephone equipment, furniture, etc. that have a value in the business. These assets will depreciate in value each year and if the business was to fail these would be sold.
    • Current Assets – This section shows the money held in the company or the funds awaiting to be repaid back to the company. This will include Trade Debtors which are the outstanding invoice amounts from your clients (including VAT), Other Debtors and Prepayments which can be invoices raised in the following months relating to the period covered and Bank Balances which are the amounts held in the company account
    • Current Liabilities – This section shows the money due out of the company. This will include Trade Creditors which are the invoice amounts owed to suppliers and contractors (including VAT), Other Creditors and Accruals which can be invoices received in the following months relating to the period covered and HMRC Liabilities (PAYE, VAT, Corporation Tax).  This section may also include Directors Loans and amounts owed to an Invoice Finance company or Bank
    • Capital & Reserves – This section shows the company share capital and the profit and loss figures up to the period plus any brought forward balances from the year end accounts.

The balance sheet should show the Net Assets figures which is where you add the Fixed Assets and Current Assets minus the Current liabilities.  This is the balance you will have remaining if the company was to fail.  This should also balance to the Capital & Reserves figures.

  • Profit & Loss – The Profit & Loss (P&L) shows the profit generated on the agency up to a period end (year to date, quarter or month). All of the figures shown on the P&L are shown without VAT included (unless you are not VAT registered) and give a breakdown of sales and overheads.
    • Sales – This section shows the Permanent, Temporary and Contract Sales to your clients. Often the Contract and Temporary Sales will be split from your Permanent Sales.
    • Purchases – This section shows the Cost of the Sales for Contract and Temporary Sales. This will include the payments due to Umbrella/Limited Companies and the full cost of PAYE candidates (including Holiday Pay, Employers NI and Gross Pay).  The Purchases figure should also only reflect the purchases relating to the Sales generated (i.e. if Candidate A works for 2 weeks and a Sales Invoice is raised then the Purchase figure should reflect the Cost of Sale for the 2 weeks worked).
    • Gross Profit – This section shows the profit generated on Contract, Temporary and Permanent Sales. The Permanent profit should be the same as the Permanent Sales and the Contract and Temporary Profit should be the Sales figures minus the Purchases figures.  It is also advisable to show the GP% figure on the profit so you can monitor if the profit margins are increasing or decreasing.
    • Variable Overheads – This section often shows the commissions payable to the consultants (including employers NI). As this cost is not fixed each month as it is based on the sales made this is often shown separately
    • Fixed Overheads – This section shows all of the costs for the business and will include Staff Salaries, Rent, Telephone, Computer, Stationary, Advertising, Travel, Entertainment, Accountancy Fees and Bank Charges. This section can be as detailed or as basic as required to allow you to monitor the costs of your business.
    • Net Profit (Loss) – This figure is the profit generated on your company. This is calculated by taking the Gross Profit Total minus the Variable and Fixed Overheads.
    • Corporation Tax – This is the Corporation tax payable on the profit generated. However as there is no corporation tax relief on Entertainment Overheads these would be added back onto the profit before the tax is calculated.
    • Dividends – Dividends can be taken if there is profit generated after the corporation tax has been calculated. This section would show the dividends distributed.
    • Remaining Profit (Loss) – This is the remaining profit after Corporation Tax and Dividends have been taken.

Company Accounts can look different depending on the accountancy firm producing them but they should all have the standard terms shown above.  There also may be other monthly/quarterly reports that accompany the management accounts which may be required by the directors to aid them monitoring the company performance based on the management accounts produced.

TBOS produces monthly management accounts for all of the recruitment agencies it represents as these are the back bone of ensuring the agency understands how their business is performing and how they can influence this.  TBOS also provides help and training on how to read the management accounts to ensure that the agency is fully aware of their HMRC liabilities and provide advice on how to increase profits or decrease overheads.  The management accounts often form the basis of the meetings we have with our agencies and help us to project their future growth or discuss potential company value.

For more information on how TBOS can help with your company accounts and figures then please contact our office.