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Every business is based on finances, but it's often surprising how many small business owners and self-employed individuals lack a solid grasp of the terminology. Here's a quick overview of some of the most important aspects of your Balance Sheet and Profit & Loss to help you understand what's happening with your company's finances. Just remember that it's always a good idea to have a knowledgeable accountant who can help ensure that you're not missing anything!

 

Gross profit is a fairly simple concept: it's the sum total of sales over the course of a given period minus your cost for those goods or Services. The cost of goods covers all factors associated with the production of those goods or services, including manufacturing, shipping and receiving. It does not take into account any other fixed overhead costs such as salaries, rent, utilities or other operating expenses.

 

As an acronym, this one is a bit of a mouthful, but it stands for 'earnings before interest, taxes, depreciation and amortisation'. This is a way of stripping down the figures to focus exclusively on the profit and cost of operations, while ignoring non-recurring costs and other factors. EBITDA is a simple way of assessing the overall profitability of a business, and even though it doesn't always provide a complete picture, it can be a handle tool for business owners and potential investors.

 

Net profit is one of the most simple aspects to your balance sheet: it is your bottom line. Net profit is the final amount of profit your company has generated after all possible costs have been deducted. Ending with positive net profit over the course of several years indicates that your company is generally healthy from a financial perspective.

 

Working capital is comprised of three factors: your current stock volume, the amount of money owed to you by clients, and the amount of money owed by the company to suppliers. It's important to carefully balance your working capital between these three elements to ensure that you don't suffer a sudden drop in your cash reserves.

 

Last but not least comes debt, the amount of money owed by your company, typically in the form of loan repayments. Debts on the balance sheet are split between current creditors (those debts which will need to be paid within 12 months) and long-term creditors. Many companies have a large amount of debt to be paid to current creditors, because it's rarely advantageous to pay off supplier debts or HMRC before it's absolutely necessary.

 

For many businesses, it is simply easier to hire specialists to deal with the accounting side of your business. This is especially true for small businesses and self-employed individuals, who often work directly in the business and don't always have the time (or the inclination) to handle the nitty gritty financial details. A good accounting firm or a strong finance department can make sure that you can focus on the other aspects of your business, while providing you with strategic, data-driven intelligence that will help guide your decision-making process.