Understanding your finances is a vital part of running your business. But understanding the detail of the company’s financial statements can be complicated and isn’t every entrepreneur’s top skill.
The financial statements (or accounts) consist mainly of two reports, the Profit and Loss and the Balance Sheet. Both are key reports when it comes to getting in control of your company’s financial health.
What’s the Profit and Loss?
Your Profit and Loss report is also referred to as your income statement or statement of comprehensive income, or more commonly as your P&L. This report gives a full breakdown of your company’s revenue (mainly this would be your sales) and your expenditure (direct costs, overheads, and any other costs).
As a business, you obviously want to make a profit and in turn make money. Careful observation of your P&L allows you to track your revenue and expenditure over a set period of time. You can then look back over the period and see exactly where you’re earning money, and where you’re losing money. The more you earn, and the less you spend, the greater your profits will be at the year-end – and your P&L is your key report for measuring these metrics.
What’s the Balance Sheet?
The Balance Sheet gives you a snapshot of your company’s financial health at a given point in time. It can also be referred to as the statement of financial position and is based on the following accounting equation: ‘Equity = Assets - Liabilities’
Assets are the things the company owns such as plant and machinery, office equipment, and stock for resale but also includes cash and amounts owed to you by customers. Liabilities are the things the company owes, such as amounts payable to suppliers, government taxes (PAYE, VAT, Corporation Tax), hire purchase loans and bank loans. In terms of equity, this is mainly retained earnings plus the funds you originally invested as shareholders (as share capital and any share premium).
The Balance Sheet shows you what the company is worth on paper right now, based on the current numbers in your accounts. So it’s a vital tool in your accounting toolbox and can be helpful for giving potential buyers an idea of the company’s value (if you plan to sell up), or for providing evidence of your financial position to banks and investors.
Accounting can be complicated, and it takes time to fully grasp all the different terms and processes. But we can help you understand more about the basics of your company accounts, and we’ll be happy to run through your latest management accounts or statutory accounts to explain what each report means and how it reflects your business’ current performance.
The content in this blog is correct as at 2 November 2021.