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Understanding Basic Accounts

By: Dave Howell - Updated: 9 Dec 2010 | comments*Discuss
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To ensure your business has a long and profitable life it's essential that you understand the basic financial management techniques that will give you the tools to operate your enterprise on a day-to-day basis. It's important that you don't simply hand the accounting component of your business to a qualified professional, as you won't then have your finger of the pulse of your business. Knowing at any given time how your business is performing is a crucial business skill that all small business owners should develop.

If you understand the basic accounts that your business is based on you will be able to:

  • Track the profit and loss over any given time.
  • Spot problems with your suppliers or customers.
  • Have a detailed picture of your cashflow position.
  • Do forward plan for the future development of your business.
  • Ensure you pay the right amount in taxes.

Your business's accounts will include these basis components:

Cashflow Statement
The cash that flows through your business is the foundations onto which all the other areas of your business are built. Your cashflow statement should be kept as up-to-date as possible. Try and build time into your day where you update these records. You can then at a glance see your business's cash situation and remedy any problems before they get out of hand.

Profit and loss statement
As a small business owner you must know how well (or not) your business is performing. You can see this from the profit and loss statement. This balances your business's income and out goings, and as it's name suggests, shows instantly if your business made a profit or loss over any given time.

Balance sheet
Not to be confused with the profit and loss statement, your business's balance sheet tracks the assets in your business. Assets are anything that your business owns. The balance sheet also shows how much your business owes that could include: any loans you have, outstanding payments to suppliers and any taxes that are owed. Limited companies and limited liability partnerships are required by law to submit these documents to HM Revenue & Excise at the end of each tax year.

With these three basic pieces of information you can:

  • See how your business is actually performing compared to the projections in your business plan.
  • Perform any number of 'what if' scenarios to see how making a change to your business could affect it financially.
  • See at a glance what your debts are and which companies owe you money.
  • Identify areas of you business where costs savings can be made.
  • Provide detailed information that investors would need if you need additional finance.
  • See if your business is approaching the VAT threshold and needs to register with Customs & Excise.

Accounting Software

Depending on the size of your business and how closely you want to track each of its financial components, software can help you to keep accurate records and generate the reports that will help you run your business more efficiently and profitably. Some of the leading accounts software that can generate the account reports you need include:
  • TAS Books 1
  • Sage Instant Accounts
  • MYOB BusinessBasics
  • QuickBooks (SimpleStart)

All of the accounting software that is available can generate the reports you need to successfully run your business. The software, however, is only as good as the data that is inputted into its database. If you don't have the time to do this, using a freelance bookkeeper could be a cost effective way of ensuring you have up-to-date and accurate financial records.

Don't confuse a bookkeeper with your accountant. The bookkeeper will input your business's financial data into the software you choose. Your account should be used to complete your tax returns. Using your accountant for bookkeeping with be very expensive, and you will inevitably have a delay in getting your financial records back.

Learning even the basics of business accounting is a superb way to improve your skills as a manager. With an up-to-date set of accounting reports you can relax and be confident you know how your business is performing.

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