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Basic Accounting Information That Will Help Your Business

As a business owner, you have to make sure you are in control of your finances on a day-to-day basis,


It is no good to wait until the end of your financial year and wait for your accountant to tell you how well your business performed.


Bookkeeping System

The first thing you need to have in place is an effective bookkeeping system so that you will be able to generate useful and accurate accounting reports.


You can have a simple manual bookkeeping system or a computerised system. Even when you have a computer system you need to understand how it works and what the reports mean.


I am going to attempt to summarise some key points that you may find useful.


Cash Flow Forecast

All businesses should try and monitor their cash flow at least on a monthly basis. Although when money is tight you could do this every week.


A cash flow is a simple way of recording when you are due to receive money and when you are due to make payments.


It will help you to recognise times when you will need to spend less or even chase your customers for payments.


This can be done by creating a simple Excel spreadsheet.


Credit Control

On a regular basis, you should review your payment terms to your customers.


I remember I had a contract which was going to generate a lot of income for my business, but I realised that the company would take 60 days to pay me and meanwhile I had to pay staff and other expenses every month.


It meant that, if I just relied on this one customer I would have a serious cash flow problem, so I had to also get smaller contracts where the payment terms were between 7 and 30 days.


I also changed my trading terms so that where I had large contracts I would ask for a deposit and for payments to be in stages.


Profit and Loss Account

As a business, you should also regularly monitor your profit or loss., which has two parts.


  • Gross Profit

Gross profit is sometimes referred to as your trading profit. This is calculated slightly differently if you have a service business or whether you have stock that you are buying and selling.

Simply put, gross profit is your sales minus the direct cost of what you are selling or providing.


  • Net Profit

This is your gross or trading profit minus all your regular expense or overheads such as Telephone, Gas, and Electric etc.


Balance Sheet

So how much is your business worth?


One of the keys to business success is to regularly monitor how much your business is worth.


Having a positive bank balance does not mean that you have made a profit. An example is a business owner who had £30,000 in their bank account and forgot that £25,000 of that had to be set aside for payments to suppliers he owed.


Liabilities

This is a list of all the companies or individuals that you owe. You could also break down your liabilities into two headings;

  • Your Current Liabilities

These are companies you owe but have to pay back within a year e.g HMRC. The long-term liability will be debts that you have to pay over a longer term example a business mortgage.

  • Assets

This is a list I things that your own.

Fixed Assets – example: Equipment, Motor Vehicles.

Current Assets - things like a positive bank or cash balance, your debtors – people who are you, and the value of your stock etc


Current Minus Current Liabilities

This figure is very useful to calculate as it will tell you whether you have sufficient immediate cash to pay your debts that you have to pay back within a year.


Your Net Worth

This is where you subtract the liabilities from your assets; this amount is your net worth.


When someone is referred to as a millionaire, this is the number that people look at.


It is possible to have a negative net worth. If you have a negative net worth this means that you owe more money than you have.


So, as a business, you will need to have a financial review and look for ways to increase income and maximise your expenditure.


Please feel free to add your comments and questions.


Join me tomorrow when I shall start a series on how to set up a simple bookkeeping system for your business.

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