Accounts
From a client's perspective, the preparation of the annual accounts is often undertaken to meet a statutory obligation such as the completion of a tax return. The information reported in the accounts relates to historic events and does not relate to current issues surrounding the client's operation.
From our perspective, the accounts can provide meaningful information to the client which can influence their current decision making.
When we have prepared accounts for a client, we issue a point sheet discussing matters relevant to the financial statements as a whole. The primary purpose of the point sheet is to assist the client in their understanding of the accounts for which they are ultimately responsible. The point sheet provides commentary on the figures and also highlights any other issues relevant to the client and their decision making.
Part of our process is to meet with the client to discuss the accounts and the point sheet and to assist the client in their understanding of their accounts.
One of our clients operates an East Sussex based motor repair workshop. Following the preparation of the annual accounts, we met with our client to discuss the results for the year. The point sheet which accompanied these accounts highlighted a key issue relating to the gross profit margin of the business.
The gross profit margin had fallen when compared to the previous year. After discussing the matter with our client, it transpired that staff costs had risen during the year - all mechanics had been given an hourly pay rise however, this had not been passed on to the customers of the business.
We then discussed with our client their customer base and also their pricing structure. It was clear that the business could pass on any staff increase to their customers without any adverse effects on the business.
After that meeting, our client implemented a price increase and the benefits were reported in the following year's results.
When we discussed the following year's results with our client, we were advised that there were no adverse reactions to the price increase and that the business now has a policy of reviewing its prices annually to ensure that any increases in direct costs are passed on to the customer.
Although our client was under no statutory obligation to report on the fall in the gross profit margin, we advised that the business should advise HM Revenue & Customs by disclosure on its tax return the reasons for the drop in the gross profit margin.
HM Revenue & Customs have industry statistics and a fall in the gross profit margin of this business when compared to the industry sector as a whole may have resulted into an enquiry into business performance. By making disclosure to HM Revenue & Customs, our client avoided an enquiry into their business performance.
By issuing a point sheet and meeting with our client, this enabled them to have a better understanding of their accounts and how their gross profit margin was calculated. This led to a change in pricing structure and also the implementation of an annual review to ensure that price increases were passed on to the customer. Also, our client understood the need for explaining the fall in the gross profit margin to HM Revenue & Customs in order to avoid an enquiry.