Profit should reflect the month
Bills don’t always arrive in the month the work happened. March’s electricity might be invoiced in May. The annual insurance gets paid in one go in January. If your monthly profit just follows the invoices, March looks cheap, January looks terrible, and neither tells you how the business is really doing. Accruals and prepayments fix that by putting each cost in the month it belongs to.
What they actually are
An accrual is a cost you’ve already had but haven’t been billed for yet, like agency staff who worked this month but invoice next month, or a utility bill that always lands late. A prepayment is a cost you’ve paid upfront that covers future months, like a year’s software subscription. The accrual brings a cost forward. The prepayment spreads it out. Agree with your accountant what’s big enough to be worth adjusting.
Keep a schedule with the workings
For each item, record the supplier or contract, the period it covers, the amount, how it was worked out, and when the invoice or reversal is due. That way anyone can follow it. Old balances shouldn’t roll on month after month because nobody remembers what they’re for. If the schedule doesn’t agree to the balance sheet, something’s missing.
Check estimates against the real bill
When the actual invoice arrives, compare it with the estimate and correct the difference in that month. If the estimates are always miles out, change how they’re worked out, perhaps using the supplier’s last three bills instead of a round guess. Over time the gap between estimate and invoice should shrink, and that’s a good sign your monthly reporting is getting more reliable.
Example: a clothing brand pays £12,000 for a year’s warehouse insurance in April, and its freelance photographers invoice a month after each shoot. Without adjustments, April shows a big loss and the following months look healthier than they are. With £1,000 of the insurance released each month and the photography accrued in the month of the shoot, profit is steady, and the owner can see margins really dipped in June, when the discounting started.
What to check
- A schedule that agrees to the balance sheet
- Workings and dates for every item
- No old balances nobody can explain
- Estimates compared with the real invoices
- A clear limit for what’s worth adjusting
Where to start
Ask for your accruals and prepayments schedule, with start and end dates, the calculation and when each item was last reviewed. If it doesn’t agree to the balance sheet, start there.