‘Understanding Your Accounts’ Part 1 – As long as I’m making a profit, that’s OK – isn’t it?



Well, it could be, but profit it is only part of the story. Financial information is there to tell you about your business, so to test how much you know about your financials, could you answer yes to the following questions:

  • Do you know how much cash you have in the business now?
  • Do you know how much cash you will be collecting from customers in the future, and more crucially, how much you will need to pay out to your staff and suppliers, or the taxman?
  • Do you know who your most profitable customers are, and which ones simply fill your time?
  • Is your future business strategy properly supported by effective business plans and budgets?

‘But I just don’t have the time to look at that detail’

Many small and medium-sized business owners or managers have schedules so fully focused on developing and promoting their products and ensuring operations run smoothly, they don’t have time to be the finance manager too. An external accountant is hired to complete the tax returns (and for limited companies, the statutory accounts), and often that’s the only form of financial information the business owner will have access to.

‘Tell me about the future not the past’

You obviously need to be compliant with Government requirements, so external accountants have a very important job to do. But tax returns and annual accounts are history from the moment they are produced. You are missing out on an opportunity to understand exactly what your numbers are telling you about the state of your business now and for the future.

‘So what can my accounts tell me about the future?’

As the title question suggests, most people understand profit and loss; so long as income is greater than cost, then great, you’ve made a profit! However, by understanding the underlying details you can reveal much more about how successful you are, or not, as the case may be.

‘Give me an example’

Have a look at your total overhead costs and see what percentage they are of your turnover (total overhead costs, divided by turnover, times 100 = overhead %). Do you know if all of your products and services are producing a profit % that is greater than this? Can you improve this in the future? Could some of your sales lines actually be making a loss after taking overheads into account?

This first blog in a series on ‘understanding your accounts’ has started by raising some of the opportunities for improving your profits and cash levels, just by taking a more in depth look into the figures.

My next blogs will look at:

  • The importance of your balance sheet and how to “read” it
  • Getting under the skin of your numbers in order to grow your business

Blog by Richard Colling, Associate Director at SouthWestfd, richard.colling@southwestfd.co.uk