What Your Business Accounts Can Tell you - Assets, Capital, Profit & Loss
- Red Accounts are just a ‘snapshot’ of your trading and will be different tomorrow
- Amber Don’t confuse profitability with cash generation
- Green Use your accounts to health check your business
Here’s your chance to discover what you can learn from your accounts and study our guide to your Balance Sheet.
What do my first set of accounts tell me?
Breaking it down, the main two parts to your Accounts will be the ‘Profit and Loss’, which tells you about your income and your costs, and the ‘Balance Sheet’, which tells you what your business currently owns and what it owes, so really what it is worth. Bear in mind that this information relates only to the specific date on which the accounts were drawn, so will be different tomorrow.
What is profit and loss?
Looking at the profit and loss, let’s start with what you have been paid during the period i.e. your turnover. You also have your ‘variable’ or ‘direct’ costs, which are those costs that vary in fairly direct proportion to what you sell, so cost of materials for example as well as production (but not admin) wages. Deducting these costs from your turnover gives you your gross profit figure. You then have your fixed or indirect costs, those that don’t change in direct relation to how much you sell or produce, such as property costs, finance costs, stationery and any admin type of wages such as book-keeper. These all add up to your overheads and, when deducted from your gross profit, leave you with your net profit.
So that’s what my business has made?
Essentially yes, but unless you are a limited company and you have paid yourself via salary rather than via dividends – and please take tax advice from your accountant in this regard - it is quite probable that you haven’t factored in your own drawings or dividends yet, which takes us on to the Balance Sheet which will include your capital account.
Give me a simple guide to my Balance Sheet
Of course, and probably most helpful if I set it out as you will see it on your Accounts:
Items that you own that don’t change regularly, such as property, machinery and vehicles
Assets that do change regularly e.g. stock, raw materials, debtors (people that owe you money), cash and bank account
Monies owed by you that are due to be paid within next 12 months e.g. bank overdraft, any elements of bank loans and HP due within next year (NB capital, not interest) and other creditors to whom you owe money
Net Current Assets
Current assets less current liabilities, your ‘liquid’ position
Creditors due more than one year
Longer-term creditors, so element of borrowing due more than 12 months away to bank, HP companies and anyone else
[fixed + current assets] – [current liabilities + >12 month creditors]
Assuming that you are trading as a limited company, you will then have:
Nominal value of shares issued
Profit & Loss Account
Cumulative profits or losses to date
Should equate to Net Assets and is essentially what the business, on paper, is worth
This is a fairly basic break down of your Accounts, but hopefully it helps you to grow your understanding.
Three things to look out for in my Accounts
- Firstly look at the Accounts! It may sound obvious, but there are plenty of people who collect a copy from their accountant, quick skim and then send it off to Companies House. The information will help you.
- If you’re not sure of anything in your Accounts, then raise it with your accountant. You know your business better than they do, so he or she may have misunderstood some of the information that you have passed on to them. Your accountant wants your business to succeed – they want you as a long-term client – so they want to help you understand and operate your business as successfully as possible.
- It is often trends within financials that are important, rather than figures in isolation: are sales rising? What about gross profit and gross profit margin? Which part of your overheads has increased most and is this reasonable or can you do something about it? The list goes on I’m afraid
In summary, make time to interrogate your financials – you might identify something which makes a bigger difference to your ongoing profitability, than that sale that you are working hard to close!
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