As a business owner, understanding some aspects of accountancy and finance can be very helpful, however, in this post-lockdown world it is absolutely vital. It has never been more important to have a good grasp on your company’s finances to survive these difficult times.
Many businesses across the UK have re-opened, but are still learning how to adjust to this “new normal”. Coronavirus rules and laws have completely changed the way businesses operate, including changed priorities, different customer attitudes and evolved revenue streams. Some companies completely changed their business models just to get any sort of income during the lockdown.
COVID-19 has also shown us that having some cash reserves in the business can actually make or break your business’ long-term health in emergency situations. Whereas in the past, you may have seen that money as a surplus that needed to be spent on something…
Getting to grips with your financial reports
It is essential for you to track, monitor and drive your financial performance in this new business landscape. To be truly in control of your cash, it is vital that you can dip into your accounts, financial reports or dashboards and understand your financial position.
So, what are the key numbers to focus on? Let’s have a look:
Budget
Your budget is an approximate amount of money it will take to achieve your strategic goals and revenue goals. It basically works as a financial plan for the future, showing how much money you should be spending on expenses during a given period and how much money you should have left. Planning your money with a budget will ensure that you will always have enough money for what you need and keep you out of debt.
Additionally, your budget can also be used as a benchmark against your historical spending. You can analyse your previous numbers and improve them in the future.
Cash flow statement
Cash is king, and the cash flow statement is your number one way of measuring the inflow and outflow of money. No matter how many sales you have, a negative cash flow can be a big threat to your business. You should always have enough liquid assets to cover your costs, and preferably enough left over to fund growth projects and pay yourself.
Understanding your cash flow statement in detail is essential, as it will allow you to always aim for a positive cash flow position in your company and measure your success.
Cash flow forecast
Cash flow is always fluctuating, which is why cash flow forecasts can help you overcome some of this uncertainty. You do this by taking your historic cash numbers and applying them for the future forecast. The historic figures are helpful to make such projections more accurate in case of some variances during the year (i.e. some of your products may have seasonal sales).
Once you notice that (after a couple of weeks or months) the numbers you predicted are getting out of hand, you can try and take action to fix them. For example, by reducing some costs, increasing your income stream, chasing your debtors (unpaid invoices) or getting extra funding. Ultimately, your cash flow forecast will act as a roadmap on how your company should be doing and if things are going wrong.
Balance sheet
The balance sheet is a snapshot of the company’s assets, liabilities and equity at a certain point in time. This is useful in seeing how much stock you have, if you’re too reliant on receivables, how much debt you have, and what the company is actually worth. The balance sheet is fundamental in understanding rates of return as well as the company’s capital structure – is the company highly geared through debt, or is it bootstrapped? All of this information will help you better understand the position your business is in when making big decisions.
There’s a bunch of ratios you can use for KPIs that use the balance sheet data, but beware this is very much one snapshot in time of the finances, and it can become outdated quickly.
Profit and loss
Your P&L sheet (also referred to as the “income statement”) helps you measure your revenue, expenses and profit. This is usually completed quarterly and/or annually. There’s also more context over time than in the balance sheet, as you can see how your sales, costs, and profit progress over time. If you’re a young company, this is particularly useful as evidence to potential investors or lenders over your ability to rapidly grow. At the end of the day, your true goal as a business owner is to increase profit and this is what P&L sheet focuses on.
We can help..
Your company’s finances can be a handful to understand, let alone manage. At these challenging times, it is more important than ever to be confident in your decisions… and we are here to support you along the way.
At ASfB, our experienced team of professionals are ready to review your business plan with you, give you valuable financial advice and take over your accounts. We will tailor our solutions specifically to your individual business needs and wants.
If you would like to discuss this further, call us on 01202 755600 or drop an email to hello@asfb.co.uk.