A vital part of running a successful business is looking after your finances. When they’re put together in the right way, the numbers paint a detailed picture and tell stories about your business. This section explains what is involved in financial management and introduces you to the basic financial statements.
2. Understanding the basics
At its simplest, financial management is about making sure you have enough money coming into the business to cover all your expenses and to make a profit.
As the business owner, it is your responsibility to make sure your business keeps accurate accounts and records, and meets all of its tax and filing obligations.
The key is to be organised, keep the paperwork up-to-date and flag up any tax or filing deadlines so that you have plenty of time to prepare for them.
Hiring an accountant can be a sound investment, particularly if you are a limited company. Your accountant can put your accounts together for you and also advise you on your finances. Remember, an accountant doesn’t generally do the day-to-day input, unless you pay extra, and they base your accounts on the figures you provide.
Always keep in mind that it is your business and regardless of the support you may have, you need to understand exactly your financial situation.
3. The 3 key elements of financial management
It’s your business and regardless of the support you may have, you need to fully understand your financial situation.
There are 3 key elements to financial management:
Financial planning is about making sure you have enough money available at the right time, first of all, to meet the needs of the business and secondly, to be able to grow the business.
Financial control is about keeping on top of how much money is coming into and going out of the business, and managing where it is coming from and going to.
Financial decision-making is about having accurate information at the right time so that you can make informed and meaningful decisions about the business, both now and in the future.
4. The basic financial statements
In order to manage your finances effectively, the first step is to put together a forecast or budget. This is an estimate of the income you expect to generate and the costs your business will incur.
Your forecast should be as realistic and accurate as possible and based on well-researched figures.
Over-estimating sales and under-estimating costs can have serious consequences and give a distorted picture of your prospects for success.
The figures you pull together for your forecast or budget are translated into financial statements. There are 3 basic financial statement or reports that you need to understand.
The Cashflow Statement is a record that shows the amount of cash coming in and going out of the business each month. It tracks where the money comes from and where it goes.
The cashflow statement is usually done for a 12 month period. For each month it shows a forecast – what you predict – and an actual – what you achieve.
This is one of the most important financial records you keep. It is useful to you to manage the business. Your bank manager and other funders will also want to see it.
Profit and Loss Account
The Profit and Loss Account is an outline of the sales your business has made minus the total costs involved in generating those sales. It shows the profit (or loss) you made in that period. This is known as your bottom line.
The Profit and Loss Account shows the financial performance of the business and how successful you are.
The Balance Sheet is a snapshot of the financial position of the business at a particular moment in time. It shows what the business owns, what it owes and what the business is worth.
A Balance Sheet is usually needed if you are looking for a large investment.
Next: Cashflow Forecast