An introduction to small business accounts
Here’s an introduction to the basic financial management tools that will help you manage your small business finances. The most important ones are balance sheets, profit and loss accounts, and cash flow forecasts.
The balance sheet
A balance sheet provides a view of the business’ value at a specific point in time. A balance sheet shows:
- how solvent the business is
- how the business is financed
- how much capital is being used
- how liquid its assets are, ie how much is in the form of cash or can be easily converted into cash
- your ability to pay what you owe
The total assets and capital on the annual balance sheet must always balance, hence the term 'balance sheet'.
For more detail on balance sheets see Understanding balance sheets
The profit and loss account
An annual profit and loss account records annual sales income, costs and expenses and shows business performance over a specific period of time. A profit and loss account shows:
- business performance over a specific period of time.
- records income (revenue from sales) and outgoings (cost of sales plus other overheads and expenses) to show whether a profit or loss has been made
- a summary of invoices that have been raised, or sales income that has been generated, including an estimate of work in progress but not yet invoiced
- purchases made from suppliers for goods or raw materials, and an estimate of cost for goods/raw materials used but not yet paid for
For more detail on profit and loss accounts see Understanding profit and loss accounts
The cash flow forecast
A cash flow forecast records cash flowing into and out of your business over a specific period of time. It enables you to ensure you can cover your costs when they become due for payment. A cash flow forecast:
- enables you to analyse expected receipts and payments to determine whether you can meet your bills
- shows when there is likely to be a cash shortfall so you can arrange suitable finance in advance – a far preferable (and probably cheaper) option than trying to find working capital quickly once you hit a crisis
- shows when there may be a cash surplus so you can consider how and where to use or invest it
For more detail on cash flow forecasts see Understanding cash flow
Want to know how to use MS Excel better? Try our online training courses including 'Analyzing Data and Working with Macros' and 'Filtering and Summarizing Data'. Online courses available here.
An introduction to small business accounts
Here’s an introduction to the basic financial management tools that will help you manage your small business finances. The most important ones are balance sheets, profit and loss accounts, and cash flow forecasts.
The balance sheet
A balance sheet provides a view of the business’ value at a specific point in time. A balance sheet shows:
- how solvent the business is
- how the business is financed
- how much capital is being used
- how liquid its assets are, ie how much is in the form of cash or can be easily converted into cash
- your ability to pay what you owe
The total assets and capital on the annual balance sheet must always balance, hence the term 'balance sheet'.
For more detail on balance sheets see Understanding balance sheets
The profit and loss account
An annual profit and loss account records annual sales income, costs and expenses and shows business performance over a specific period of time. A profit and loss account shows:
- business performance over a specific period of time.
- records income (revenue from sales) and outgoings (cost of sales plus other overheads and expenses) to show whether a profit or loss has been made
- a summary of invoices that have been raised, or sales income that has been generated, including an estimate of work in progress but not yet invoiced
- purchases made from suppliers for goods or raw materials, and an estimate of cost for goods/raw materials used but not yet paid for
For more detail on profit and loss accounts see Understanding profit and loss accounts
The cash flow forecast
A cash flow forecast records cash flowing into and out of your business over a specific period of time. It enables you to ensure you can cover your costs when they become due for payment. A cash flow forecast:
- enables you to analyse expected receipts and payments to determine whether you can meet your bills
- shows when there is likely to be a cash shortfall so you can arrange suitable finance in advance – a far preferable (and probably cheaper) option than trying to find working capital quickly once you hit a crisis
- shows when there may be a cash surplus so you can consider how and where to use or invest it
For more detail on cash flow forecasts see Understanding cash flow
Want to know how to use MS Excel better? Try our online training courses including 'Analyzing Data and Working with Macros' and 'Filtering and Summarizing Data'. Online courses available here.