No calculator required – Finance for non-Finance types
Starting up a new business but never run a company before? Always worked for an organisation that’s had an Accounts Department who looked after all the financials? Join the club. Here’s a brief guide we found when we first started up and it’s so simple and easy to understand we thought we must share it.
Businesses typically produce two different types of financial update; a profit and loss (P&L) account looks at the operational performance of the business whilst a balance sheet lists assets and liabilities against cash, to give a truer picture of long-term viability. Here’s what they look like:
Five concepts you need to understand
- Cash flow: the ability to meet current liabilities, such as suppliers and salaries. Remember when Woolworths went bust? They were a profitable business, but just have enough money in the bank to pay its way! Cash is King – worry about cash before you focus on your profits!
- Debtor turnover: how quickly you can pay associates or freelance staff if you’re a service business.
- Liquidity: current assets versus liabilities expressed as a ratio. 2 :1 means you have £2 to every £1 you owe.
- Profitability: not just how much is coming in – the best measure is Return on Capital Employed (how much a business can make from its assets).
- Stock turnover: how long stock stays on the shelves. This influences how quickly you get paid and how quickly you can pay your suppliers.