For most SMEs, monitoring the business finances is the best way to measure performance and mitigate losses.
To do this, you’ll need more than the regular audited annual accounts or daily entries.
Instead, you’ll need an account that shows your business’ financial position over some time.
Here’s where management accounts come in handy.
Management accounts are great for monitoring a business’ financial performance for a given period.
A management account shows the current economic condition of your business and helps you make better decisions for your small business.
If you own a small business in Hong Kong and you’re wondering if and why you need a management account, keep reading to find out all you need to know about management accounts for Hong Kong SMEs.
What are management accounts for Hong Kong SMEs?
Management accounts for Hong Kong SMEs are cumulative financial statements for a given period during the business’ financial year.
Thus, management accounts could be prepared monthly, quarterly, or even bi-annually.
As the name implies, management accounts are prepared for the executives or managers of the business.
Unlike annual audited accounts, which can be shared with the public, in the case of a public company, and with shareholders and third parties, management accounts are only presented to the business owners who utilize these accounts to make daily and long-term decisions for the business.
Why are the benefits of management accounts for SMEs?
Management accounts provide vital insights required to improve business processes or expand a business.
For example, you can identify and monitor trends in your sales, expenses, and income which can help you improve your business finances and increase productivity.
More specifically, your Hong Kong small business needs management accounts for the following reasons:
1. Cash Flow Management
A management account gives business owners up-to-date cash flow information.
You can easily spot income and expenses trends in a management account and plan your cash flow management strategy to avoid a financial crisis.
2. Tax and dividend planning
In computing a company’s tax liability, accountants use management accounts.
For example, tax officials in Hong Kong often consult management accounts to assess whether Hong Kong tax authorities have correctly calculated a company’s profits tax obligation.
Companies also use management accounts to determine if dividends would be paid in any year.
3. Improved auditing process
Auditors often need other financial documents to review your business’ financial statement, and the management account is excellent for this.
Also, if you consistently maintain management accounts for your small business, you’ll be able to identify accounting issues and remedy the errors before the auditors’ audit.
4. Fraud detection
Management accounts also help you detect fraud and malpractices easily since you’ll be reviewing your business finances at shorter intervals.
5. Informed decision-making
A management account helps small businesses to make well-informed business and investment decisions.
For example, you’ll be able to determine when to cut costs to maximize earnings and increase profit with management accounts.
You’ll also know when to invest cash not being used.
What is the content of a management account?
Preparing a management account is less daunting if you know the content of a management account.
You’ll also be able to interpret and understand the management account if you know its content.
Typically, management accounts show a company’s:
1. Cash flow statements
Management accounts show the cash flow statements of a business for a period of time.
With this, you can monitor the inflow and outflow of cash for your business for a month or more.
A cash flow statement shows how much money was received in a given month compared to the previous month, how much was spent, any changes to the business’ cash reserve, and the closing bank balance.
2. Profit and loss statement
A management account will show the flow of the income earned by the business and expenses incurred as well.
This is referred to as a business’ profit and loss statement.
This gives a company insights into actual business performance.
3. Statement of financial position
The statement of financial position or balance sheet forms part of the management account.
It highlights your business assets, liabilities, and equities.
In addition, it shows your business’s current financial position for the period in view.
4. Executive Summary
Apart from the specific books of accounts in a management account, management accounts contain key points on different aspects of the business, such as turnover ratios, profit margins, and expenses.
These are usually stated in the executive summary of the management account.
The executive summary also shows the performance of the different units of your business.
This allows you to compare the performance of the business units.
5. Key Performance Indicators (“KPI”)
KPIs are indicators that can be used to specifically identify your business goals and monitor how your business is achieving these goals.
As a result, KPIs are frequently used to assess a company’s progress toward its objectives.
A management account usually includes the business KPIs and shows how the business has achieved the goals.
This way, you’ll be able to track short-term and long-term objectives for your business.
Does your small business need a management account?
While there are several advantages of creating a management account for your small business, it is not compulsory.
Hence, you do not have to produce management accounts for your small businesses.
But certain circumstances make having a management account desirable. Here are some of these instances
1. When your business needs to make projections using accurate data
Your small business needs a management account if your business needs accurate financial data to improve day-to-day or long-term business activities.
2. Requests from external parties
External parties such as auditors, tax authorities, investors, and other stakeholders may demand management accounts when an audited account is unavailable.
Thus, it may be desirable to create management accounts for your small business to meet up with third-party requests.
3. Management accounts are essential for startups
If your business is a startup, it may be desirable to have a management account drawn up before completing a financial year and preparing an annual account.
Management accounts are essential for scaling your small business.
The insights you gain from the management accounts will help you make timely decisions to improve your business growth and profitability.
If you own a small business in Hong Kong and you’re considering preparing a management account for your business, feel free to take advantage of our bespoke accounting services for small businesses.
Congratulations, you’ve decided to start a company.
But have you thought about where you are going to register the company?
Choosing the jurisdiction for your company has a significant bearing on the overall operations, and this is a decision you cannot take lightly.
The Bahamas has always been on top of the list of founders as a preferred location to register an offshore company for several reasons.
So read on to find out what’s in store for you if you are headed to this island nation.
1. No minimum paid-up capital
The corporate laws of the Bahamas don’t require offshore companies (known as International Business Companies as per the Bahamian laws) to have any minimum paid-up share capital.
This means that you have complete control over how much you want to incorporate a company with, and that amount can be as little as you want.
2. Tax neutrality
Tax benefits are one of the major advantages of establishing a business in the Bahamian economic landscape.
You don’t have to pay any taxes — this includes corporate tax, capital gains tax, income tax, inheritance tax, or sales tax.
You are only liable for licensing fees, property and stamp taxes, and tariffs for imports.
3. Flexible immigration policy
The Economic Permanent Residency offered by the Bahamian Government makes it easy for individuals to work and live in the country.
Individuals who hold a permanent residence card can clear immigration freely and reside in the Bahamas for any length of time.
4. Absolute anonymity
As per the provisions of the International Business Companies Act, 1990, a foreign company can conduct its business in the Bahamas with complete privacy.
Even the names of the shareholders don’t have to be provided to the Corporate Registry.
The companies also don’t have to comply with any annual reporting requirements.
5. No exchange control laws
The offshore companies in the Bahamas are not subject to any exchange control laws.
They are allowed to transact freely in any currency.
However, any dealings in Bahamian Dollars should be approved by the Central Bank.
6. No filings are needed
Offshore companies don’t need to file any statements of accounts.
The only requirement is to maintain the records that set out all the transactions, and the records should be maintained for five years from the date of the transaction.
Companies also have the flexibility to maintain the records outside the Bahamas.
However, the registered agent in the Bahamas should be informed about the records.
7. Flexible rules for appointing a director
Offshore companies only need a single director.
Both corporate and individual directorships are allowed, and the director doesn’t have to be a resident of the Bahamas.
Appointment of nominee directors is also permitted.
The directors are also free to hold their meetings in any location and don’t have to remain confined to the registered office address.
The Bahamian Company Law doesn’t require you to appoint a company secretary either.
8. Bookkeeping is extremely simple
There are no obligations for filing the account or annual returns.
Offshore companies are also not subject to any audit requirements.
9. Shareholder requirements are straightforward
You need to have at least one shareholder.
The shares should be registered, but no bearer shares are permitted to be issued by offshore companies.
You can issue both voting and non-voting shares.
Nominees shareholders can be appointed.
No annual general meetings need to be conducted for the shareholders.
Downsides to incorporating in the Bahamas
Despite the advantages, there are certain challenges you may face when incorporating an offshore company in the Bahamas.
In 2018, the Bahamas passed the Commercial Entities (Substance Requirements) Act 2018 (the “Substance Act”) to prevent “shell” companies from being incorporated in the Bahamas to evade taxation in the home country.
As per the provisions of the Substance Act, requires entities, including International Business Companies, that carry out the following activities to prove a substantial economic presence and real economic presence within the Bahamas.
These activities include:
fund management business;
financing and leasing business;
distribution and service centers business;
commercial use of intellectual property;
This is also applicable to a holding company that has one or more subsidiaries engaged in such activities.
To fulfill the substance test, a company needs to demonstrate:
Full-time employees in the Bahamas
An adequate level of annual expenditure incurred in the Bahamas or expenditure incurred towards outsourcing to service providers
Adequate levels of board management and control in the Bahamas
Physical offices in the Bahamas or expenditure incurred towards outsourcing to service providers in proportion to the entity’s activities.
Offshore companies cannot outsource any core income-generating activities to anyone outside the Bahamas.
While outsourcing to a third party within the Bahamas is allowed, the offshore company must exercise sufficient supervision and management.
Secondly, even though British English is the official language, most of the population speaks English with a Creole dialect.
Some even have a pronounced African accent.
As a result, you may find it challenging to communicate with various service providers and get the paperwork organized.
Thirdly, court systems in the Bahamas are not very efficient.
So what are my options for registering an offshore company?
While registering a company in the Bahamas looks fantastic on paper due to financial privacy and tax benefits, there are significant challenges involved in navigating your business.
But that’s no reason to feel disheartened.
Why not head over to Hong Kong, which has emerged as the top choice for entrepreneurs in recent years for setting up an offshore company?
Hong Kong has been ranked 3rd by the World Bank for the ease of doing business and offers several advantages such as an attractive tax system, political stability, superior infrastructure, productive workforce, and access to Mainland China.