Summary of the Understanding your numbers

There can be a lot of information out there around your business numbers and often it is easier to leave that for the accountants. However, your numbers are really important and can be a key resource in knowing how your business is going. They help you the owner make better decisions. Hence this blog series has been created – understanding the numbers. This blog summarises the key points in  the series and provides links to them so you can review what we have covered so far.

Part 1 – Profit & Loss

Managing your business Part 1 – Understanding the numbers - Profit and Loss.  Definitions of key terms sales, gross profit margin, net profit, overheads and net profit margin and methods of calculating and evaluating key terms provided.

Key messages of this blog are sales, gross profit and net profit are key to understanding your business and its profitability.  It is also necessary to be honest regarding the business cost versus tax choices/personal cost; what is the true cost of running the business?

Part 2: accrual accounting

Making sense of the numbers – Part 2 Accrual Accounting.  Accrual Accounting is defined as recording the transaction as it happens.  Accrual Accounting provides business operators with greater understanding across various areas of business management.  For example, you will have greater knowledge of payment obligations, your business performance, forecasting and true profitability. 

The key message for this blog is make sure your business uses accrual accounting for processing business transactions.  

Part 3: Connecting the Profit to Cash

Understanding your numbers Part 3 – Connecting the profit and loss to cash in the balance sheet – Why a profit doesn’t always mean more cash in the bank

A major concern for a business owner is reporting a profit but having a cash drain.  All businesses have three, monthly financial statements; the profit and loss, the balance sheet and the cashflow statement.

A Profit and loss statement is the record of the business’ operational activity.  The Balance Sheet is three sections:

Assets – what the business owns

Liabilities – What the business owes

Equity – What you own of the business

The Cashflow Statement is a representation of what happens to the cash in the business, linking the profit and loss statement to the balance sheet.  The cashflow statement illustrates movement in cash between two points:

Opening Cash +/- operating cash, financing cash, investing cash = Closing cash

Key message for this blog: – Operating cash must be positive to generate a sustainable business.  External funding (banks, external lenders) can dry up quickly.  Receiving monthly financial statements can indicate accurately how you are going in business.