No matter what stage you are at, businesses need to have a detailed understanding of their financial situation.

By understanding the finances of your business, you will be better placed to deal with whatever challenge may come your way: whether it’s achieving the next level of growth or overcoming a hurdle for your company. Keeping tabs on your finances can also help in times of emergency – such as the recent COVID-19 outbreak – and help you to plan a recovery route.

The key to being on top of your finances is through your management accounts. These accounts should cast a picture of your current finances at any one time, as well as indicate the cash flow patterns of your business over time. If you have an internal accountant or bookkeeper on your team, they should already have a hold of these accounts. However, if you are looking at your accounts for the first time, it’s essential to know what they are showing you and what to be aware of.

In this blog, we will be explaining what you can expect to see in your accounts and the best practice for keeping on top of them.

• What is included in your accounts
• What to take note of
• Make regular checks
• Ask if you’re unsure
• What to do if your accounts don’t look as good as you expected

What is included in your management accounts

When you receive a copy of your company accounts, this will be split into two parts: a ‘Profit and Loss’ section and a ‘Balance Sheet’ section. Take time to read through both sections – many businesses often skim these parts before passing them on, but they can provide meaningful insight into your financial situation. Let’s go through what each section means.

In the ‘Profit and Loss’ section, you will see the sales that your business has made in the set period as well as the relevant costs of sales and overheads. These costs will include staff salaries, materials bought, any equipment costs, property fees and bills, and any other costs associated with the running of your business. Remember that, if you are the business owner and don’t pay yourself on a salary basis, your account probably won’t show the true cost of your personal income and will need to be accounted for separately.

By deducting the costs of these overheads from your business’s turnover (which will be indicated in this section), you can find your net profit over the time that the account covers.

The other part of your account, the ‘Balance Sheet’, is a statement of your company’s assets, equity and other liabilities at the end of that period. In this section, you will see the following:

• Fixed assets – long-term assets, such as machinery or buildings owned by your business
• Current assets – this includes your stock and materials, cash and any debts currently owed to you (such as through unpaid invoices)
• Current liabilities – any money that is owed by you and will need to be paid within the next year, such as loan repayments
• Net current assets – the amount of all your current assets, minus your current liabilities
• Creditors due more than one year – similarly to your current assets, this section will include any long-term creditors that you pay (such as business mortgages)
• Net assets – your fixed and current assets, minus your current liabilities and long-term creditors
• Share capital – this will appear if you are a limited company, and will indicate the value of any shares issued in your business
• Profit and loss account – your profits and losses cumulatively to date since the business was formed
• Capital account – this will be the same as your net assets and tells you what your business is worth

The Balance Sheet offers a rounded view across your business of what capital you have, including that tied up in assets, and what you owe, making it essential to keep track of to determine your overall cash situation.

What to take note of

The first thing you should consider when checking your accounts is whether you are in a good or a bad position. The definition of ‘good’ and ‘bad’ may vary between different firms, but, generally, you should make sure your business is showing a net profit, and that you have sufficient current assets in place to meet any debts and regular payments. Over time, reserves should be built up to, should your business need it.

When looking at your accounts, you should also make a note of any patterns that emerge. This could mean looking across all of your accounts to date as opposed to just the most recent. Trends that you may find could include decreasing/increasing sales, decreasing/increasing profits or decreasing/increasing costs.

Knowing these patterns will allow you to forecast your future finances, as well as put plans in place to address them. For example, if your costs are gradually rising, you will want to consider increasing the price of your products and services, seeking cheaper alternatives from your existing suppliers or negotiate better pricing from your existing suppliers. If your sales are increasing, you may want to understand why and how to maximise this growth through further investment.

Alternatively, if your accounts aren’t in the position you had hoped, it might be time to take action against this, such as seeking external finance to boost your cash flow.

Make regular checks

Once you know what to look for in your accounts, you need to make a habit of regularly reviewing them, at least monthly. This could be something you do yourself, or you could appoint either an accountant, bookkeeper or business advisor to do this for you.

Management accounts give you a snapshot of your finances at that particular time. Even if your account looks good at that point, it may look quite different in the next month or year. That is why checking frequently will give you a more holistic view and can act as a health check for your business.

If you are a limited company, you will be required to submit your accounts to Companies Houses every year. However, you should be reviewing your accounts internally much more frequently – monthly, if not weekly. By having a routine of often checking accounts, you will also be more likely to spot any unusual activity and better protect your business against fraud.

Ask if you’re unsure

Even if you have an external resource to undertake your management accounts on your company’s behalf, there is still value in you having an understanding of them. Your accounts can aid your business plan as a whole, so it is essential to be able to utilise them for both internal and external stakeholders.

If you aren’t an accountant, it can be difficult to understand everything that is shown in your management accounts. If you are ever unsure, you should ask your accountant for support, as they can take you through the different elements of the account and what different costs mean. By doing so, and the more regularly you check your accounts, the better your understanding will become and the more in charge of your financials you will become.

What to do if your accounts don’t look as good as you expected

Making yourself aware of your accounts is vital in understanding the financials of your business, good or bad.

If your accounts don’t look as healthy as you expected, take solace in the fact that you have identified this and can now take steps to rectify any issues.

Get in touch with the team today to find out what solutions may be appropriate to address the problems in your accounts.

Please call the team today for a free consultation on 0203 327 0567 or email [email protected].