The UK Government is looking to reduce the compliance burden on small businesses by introducing “Simpler Reporting” for their annual accounts. The Department for Business Innovation & Skills produced a discussion paper on how this might work and, as the deadline for response recently closed, there has been a flurry of articles on the subject.
I have read these with interest and have detected a considerable confusion between external reporting requirements imposed on businesses versus their own internal management information needs. I have also seen the usual vested interests making claims that, to me, frankly, make no sense.
Of course it is a good thing for small business owners to have accurate, up-to-date financial information available to them. Only with such information can they operate their businesses efficiently and make sensible decisions about their futures. So, I think we can all agree that, as far as internal reporting is concerned, the imperative must be for better, rather than simpler reporting.
To that end, I believe that the new, cloud-based accounting services promise the best opportunity to bring better reporting to the typical small business – and are already doing so.
However, with regard to external reporting, which is what the Government’s discussion paper is really about, I do think there is a strong argument for simplification – perhaps even abolition.
Yes, there must be a requirement that small businesses report their financial information to HMRC for taxation purposes and the discussion paper’s suggestion that a common (simplified) format could be introduced to cover both limited companies and unincorporated businesses alike has merit in my view, the same cannot be said about the filing of company accounts at Companies House.
Commentators have suggested that diluting the financial information reported to Companies House would prejudice the interests of suppliers to small businesses. A similar argument suggests that small businesses would find it harder to obtain credit. This is nonsense. Let’s consider the real world here:
I run a small business. Our accounting year end is 31st March each year and we are required to file a cut-down version of our full annual accounts at Companies House within 9 months, i.e. by 31st December. We have to go to the time and expense of compiling detailed, full, statutory accounts which provide us with no value internally merely so we can use these as the basis of the vastly abbreviated accounts that have to go to Companies House.
And how valuable are our filed numbers to the outside world? In such an abbreviated form, the content is of little use – that’s before we consider the fact that they are so out of date. Our 31st March 2011 accounts will be filed in December 2011. In December 2012, until we file our 2012 accounts, the numbers in the public domain, at Companies House, will be 21 months old.
Lenders and suppliers know this and do not, in the real world, seek to rely on these old, abbreviated numbers. They are able to use the reality of the commercial relationship to insist on seeing more detailed, up to date, internal financial information.
Would you buy a second–hand car based on photographs showing just some only of the parts – and showing them as they were nearly two years ago? Exactly.
I support the initiative for simpler reporting. I also understand that small businesses need better financial information at their fingertips. The two are not mutually exclusive.