Help! I don’t understand my accounts! The two sets of numbers you need to know to run your business.

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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 doesn’t have to be that scary. Yes, it’s crucial that you understand your numbers. You need to have a good idea of which figures to keep an eye on so you can plan your next steps. In essence, there are two sets of numbers you need to get your head around to understand your accounts so read on.

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? How do you know if what you are doing in your business is having an impact on the finances?

Hi. I’m Anna Goodwin, your friendly finance mentor.  With over 30 years of experience, 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.

Why It’s Important For You To Understand Your Accounts

Even if the thought of investigating your business numbers brings you out in a cold sweat, taking a little time to understand your accounts will have big benefits – in both the short term and the long term.

Here are just some of the reasons why you should take some time 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

The two sets of numbers you need to know

The reality, two main sets of figures you need to know to understand your accounts are:

  1. Profit and Loss account
  2. 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
  • Turnover
  • Certain categories of expenditure

 

This explanation of each of these is taken from my online course – Finance for Non-Financial People – Understanding your accounts.

For all of these 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. My client recently went through her Profit and Loss Account with me and we saw that the gross profit was much less than she had anticipated. After further investigation we realised that this was because of her pricing not being high enough to cover her total costs. As a result she reviewed her pricing and which will put her back on track for this year.

Balance sheet

Simple, right? The numbers need to balance.

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.

Don’t just leave it to your accountant. Take time to understand these two sets of numbers and you will see the benefit – trust me! Speak to your accountant or business mentor if you are still unsure. They will help you understand your accounts and then there will be no stopping you!

Next time, I will show you how to manage your time better and be more efficient.

Anna Goodwin @2021 All Rights Reserved.

www.annagoodwinaccountancy.co.uk