Accounting Tips For You

Understand the Numbers

Accountancy is a mystery to many people and no more than a necessary evil to lots of business owners. Yet understanding accounts is a fundamental requirement for business success. After all, if you can’t answer the question, ‘Have I made a profit this month?’, then how can pretend to be managing your business? However wonderful your product or service, and however excellent your marketing, you have just got to have a grip on the numbers.

And not just any numbers too. I often hear business owners pluck numbers out of the air when, on closer, inspection the reality is very different (and probably much less optimistic). If you don’t know the real numbers then your business is very likely to be in trouble even if – maybe especially if – you are growing fast. Growing businesses can run out of cash very quickly if no one is checking that bills are being paid on time!

So here are the basics you need to understand. Firstly, the fundamentals of your profit and loss account. You need to know your turnover – how much you are selling; your direct costs – what you have to buy to make what you sell; and your administrative costs – staff, stationery, marketing etc. Turnover minus direct costs gives you your gross profit. Take away administrative expenses from this and you have your net profit. The latter is what gives you money to take out of the business and spend at the end of the day.

You should know these figures every month, soon after the month ends. If you only know the profit (or loss) when your accounts or tax return are completed at the end of your financial year, it may be too late to make any alteration to the way you run your business. In other words, you will only find out what you need to know in order to change things when it may already be too late to do anything!

In addition to a profit and loss account, your business needs to produce a balance sheet. This is an accountancy term for a snapshot of the businesses assets and liabilities at a particular moment in time. For small businesses, this is perhaps not so crucial to the day-to-day running of the business but you have to be aware of what you owe who owes you what and for how long.

You also – and most crucially – must be aware of your cash-flow. More businesses fail from lack of cash than anything else, even when they are making profit. If you can’t pay your rent because you have ordered too much stock, then you are in trouble whatever your profitability. You absolutely must collect cash promptly and take swift action when customers delay payment.

So make sure you know your numbers. There is no excuse for ignoring this. Do some research on the Internet, buy a book, go on a course or talk to your accountant. Even if you employ someone else to enter the numbers for you, make sure you take time regularly (and at least monthly) to review them with a view to making any necessary changes to your costs or procedures. You just can’t be a good business owner without understanding the numbers for yourself.

Ian Marlow runs HFM, a tax and accounting business based in London serving clients both resident in, and living outside, the UK. They regularly advise clients starting new businesses or help existing businesses with their accounts. For more detailed information and access to their excellent free monthly tax newsletter, go to the HFM website => http://www.hfmtax.co.uk.