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I Don’t Understand My Business Accounts

What are Business Accounts?

Business accounts are a vital tool that helps the Business stay on track and keep growing and moving forward.

At the end of the business year a set of accounts is created to show the:

Profit & Loss of the Business at the year-end

Balance Sheet at the year-end

Some Financial Notes explaining who the owners are

How can a set of Business Accounts help the Business to keep growing and moving forward?

  • A set of Business Accounts shows how well a business has done during a financial year.
  • Show the financial position of the business this year and should show last years’ figures also so comparatives can be made.
  • Help Business owners keep an eye on sales versus the cost of sales to make sure profit margins are not decreasing.
  • Keep an eye on the cost of overheads so costs do not spiral.
  • Explain to owners and HMRC what figures have been used to calculate taxable profit.
  • Help keep an eye on Assets and the value of those Assets.
  • Make sure the value of people who owe the business money does not grow too high, income from sales should come into the business quickly.
  • Be aware of the value of money the business owes to suppliers and loans so the business always has a positive figure in the Net Current Assets, so the business can pay off its own debts without needing to borrow money from the owner.
  • Help the Business Owner to make plans for future growth and development so the Business can keep moving forward and Profits can keep increasing.
  • Business Accounts are also a vital report that lenders and suppliers will ask for when providing loans and terms for payment of bills.  A good set of Accounts could be the difference between getting 30 days terms to pay suppliers and getting 60 days terms to pay suppliers which also helps with cash flow.

What is a Profit & Loss Account?

A Profit & Loss account (P&L Account) shows the Profit or Loss made from sales minus expenses:

Sales:

Income from goods and services sold

Cost of Sales:

The direct costs linked to sales.  Cost of sales are expenses you would not suffer if you had no sales:

  • Materials used on a production line
  • Labour used on production line / Providing service if the business sells a service
  • Small tools used etc

Gross Profit / Loss:

Sales minus Cost of sales =  Gross profit or Loss


Overheads:

Overheads are all the other expenses that you would suffer even if the business did not make a sale:

  • Advertising
  • Rent
  • Stationery
  • Telephone
  • Wages not linked to the production line / Providing the service if the business sells a service

Pre-tax Net Profit:

Gross Profit/Loss minus overheads = Pre-Tax Net Profit / Loss

What is a Balance Sheet?

A Balance Sheet shows where either physical money, or money tied up in something else, sits for a business at the year-end.  It is made up in sections:

Fixed Assets:

Fixed Assets are items of machinery and equipment that will last more than 1 year.

They are valued by:

  • Original cost when items purchased
  • minus a value of deterioration each year = current value.


Current Assets:

Current assets are items that are already physical cash or items that can be turned into physical cash quickly:

  • Customers who owe the business money
  • Petty cash not in the bank
  • Cash in the actual bank account


Current Liabilities:

Current Liabilities are small loans that will be paid by the business quickly:

  • Suppliers Bills (Creditors)
  • Tax Bills
  • Small short-term loans

 

Net Current Assets:

Fixed Assets + Current Assets – Current Liabilities = Net Current Assets.

This shows the value that would be left in the business after all business debts have been paid.


Net Current Assets figure and Capital & Reserve figure will always be the same value.  This is how accounts balance and why this report is called the Balance Sheet.    Every Business should strive to have a positive Net Current Assets figure and Capital & Reserve figure, showing the business has enough value in its assets, to cover all debts and still have money left.  This is a Positive Balance Sheet.

Do Business Accounts cover the calendar year?

A Business will have an accounting start date and end date for each year.  This period will be 12 months long, but this might not be the same as a calendar year. 

  • Sole Traders & Partnerships will normally have the year 1.4 to 31.3 because this runs close to the tax year (6.4 to the following 5.4).
  • Limited Companies will have a year that is determined when a Limited Company is created.  If you created a Limited Company on 1.5.2020 your year-end would be 30.4.2021.  

What steps can I take to be more comfortable with understanding the Business Accounts?

Go through your last set of Business Accounts and follow the above notes to see if you are now more comfortable with understanding the Accounts.

Still fear the Figures – Get in touch and let us shed light on the matter.  We can go through your current accounts with you, step by step and explain what each line means and how it compares to last year.

Feel comfortable with the layout of the Accounts but need help with making growth plans? – Get in touch and share your story so we can understand where you would like to be.  We will help with cashflow projections and plan different scenarios, making easy to follow action points to get you to your dream faster.



 

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