Does the mere mention of ‘accounts’ fill you with dread? Are you terrified of numbers and prefer to leave ‘all that stuff’ to your accountant?
Well I’m here to say that it’s crucial that you understand your accounts. You need to have a good idea of which figures to keep an eye on so you can plan your next steps.
I had a marketing review session with Danielle Robyn of Deearo Marketing last week. She said that businesses rarely put aside finance or time for marketing. It’s the same with accounts – many people only want to sign a set of accounts so that they can be submitted on time. They don’t even look at the figures!
But they could be missing out. If you haven’t got an understanding of the numbers in your business, how can you possibly make the best decisions for your business? Are there any financial measures to take advantage of currently? Would a bounce back loan help your business? How would it impact on your accounts?
Hi, I’m Anna Goodwin – Author of five books, Director, Mentor, and Trainer for Anna Goodwin Accountancy. Basically, I take the stress out of finances – both business and personal. From running my own business and helping others to run theirs, I know it’s important to understand your accounts and act on them.
I’m not saying that you need to have an in-depth knowledge of accounts, but you need to know the basics. In fact, I’m such a strong believer of this that I made it the focus of my latest book, Your Business Your Numbers.
The two main sets of figures you need to know are:
- Profit and Loss account
- Balance Sheet
Profit And Loss Account.
It’s important to use the profit and loss account and review it regularly to see if you are hitting your targets.
These are the main figures to look at:
- Gross profit
- Net profit
- Certain categories of expenditure
This slide is taken from my online course – Finance for Non-Financial People – Understanding your accounts.
For all of the above figures, it’s important to compare the actual figure to the target set and analyse why the actual figure is different. This detective work will help you to identify areas of your business that need a bit of work so that you can make changes.
In a nutshell:
The balance sheet is broken down into three parts:
1. Business Assets – What The Company Owns
- Fixed assets – computers and furniture
- Current assets – bank and cash and trade debtors
2. Business Liabilities – What The Company Owes
- Current liabilities – bank overdraft, amounts owed to HMRC
- Long-term liabilities – bank loan
3. Shareholder’s Funds – Issued Share Capital And Reserves
In short, does your business own more than it owes? If the answer is yes, then the balance sheet total will be a positive figure. This will show that a company is healthy. If your business owes more than it owns, the balance sheet total will be negative — and that’s not good news, because it means your business doesn’t have enough money available to pay its debts.
Why It’s Important For You To Understand Your Accounts:
- Gives you more focus on what is happening with your business or company
- You can concentrate on the weaker areas
- Gives you an extra skill that you can use in this job and future ones
- Gives more meaning to the figures
Take time to understand these two sets of numbers and you will see the benefit – trust me!
Next week, I will show you how to use these figures to calculate your Key Performance Indicators (KPIs) and why they are so important to the success of your business.