An ESSENTIAL BUSINESS workbook · An ESSENTIAL BUSINESS workbook Taking careof business Take...

0An ESSENTIAL BUSINESS workbook Taking care of business

Take control of your cash and manage your business with confidenceJOHNNY MARTIN FCA

cash flow profit & loss breakeven vatbalance sheet forecasts sales taxation

Understanding your��

businessfinancesEXAMPLE MATERIALS

© Cobweb Information 2014. Not to be reproducedwithout permission from the publisher.AUTHOR RIGHTS: Johnny Martin

To Sophie, Ollie, B-al and Mintyand all the entrepreneurs andbusiness owners of the futureEXAMPLE MATERIALS


An ESSENTIAL BUSINESS workbook Taking care of business

Published by

Take control of your cash and manage your business with confidenceJOHNNY MARTIN FCA

Understanding your

businessfinancesEXAMPLE MATERIALS


The Essential Business seriesUnderstanding Your Business Finances workbook is part of the award-winning Essential Businessseries of workbooks and guides. It is a very practical workbook that has been carefully produced to help readers understand the three key financial reports in a business and appreciate the vital importance of a sound business model.

Like all Essential Business publications, Understanding Your Business Finances has been created for business start ups, small business owners and the professionals who guide them.

First published in Great Britain in 2014.

© Cobweb Information, 2014

The right of Johnny Martin to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

Written by Johnny Martin, Johnny Martin Business Education Ltd

Designed by Julie Stanford, Cobweb Information

Edited by Marianne Whitfield, Cobweb Information

Published by:

Cobweb Information

Unit 9 Bankside, The Watermark

Gateshead NE11 9SY

T 0191 461 8000

E [email protected]

W www.cobwebinfo.com

Understanding Your Business Finances is part of the Essential Business series.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise without the prior permission of the publisher.

The publishers make no representation, express or implied, with regard to the accuracy of the information in this book. Whilst every care has been taken to ensure that the information is true and accurate, the publishers cannot accept responsibility for any omissions or inaccuracy appearing or the consequences thereof.

Cover photograph: James Pike

Image credit, p76: DMStudio

Price UK £28.95 RRP

For the attention of our readers

Understanding Your Business Finances

offers business guidance and information,

and not direct advice.

If you want more detailed information and

guidance, we recommend that you always

take advice from professionals.

EXAMPLE MATERIALS© Cobweb Information 2014. Not to be reproduced

without permission from the publisher.AUTHOR RIGHTS: Johnny Martin

Who is behind your workbook? vi

Welcome 1

Chapter 1 Introducing the three key financial reports 5

Worksheet 1 What do you need to know about your finances? 6

The cash flow forecast 7

The profit and loss report 7

The balance sheet 9

Chapter 2 Understanding business models 13

What is a business model? 14

The components of a business model 14

Creating and adapting your business model 18

Worksheet 2 Thinking about your business model 20

Keep adapting your business model to stay ahead 21

Chapter 3 Forecasting sales 23

What is a sales forecast? 24

Researching your market and competitors 24

Tips for forecasting sales 25

Setting your prices to make a profit 26

Worksheet 3 Working out a minimum selling price 28

Forecasting your sales volumes 30

Using your sales forecast 32

Chapter 4 Getting to breakeven 33

What is breakeven? 34

Fixed costs and variable costs 34

Calculating your breakeven point 34

Worksheet 4 Calculating your breakeven point 36

How to use your breakeven calculation 38

Understanding Your Business Finances © Cobweb Information, 2014 iii

Contents



Contents

Chapter 5 The profit and loss report (the P&L) 39

What is management accounting? 40

Understanding the profit and loss report (P&L) 41

Reviewing trends and gross profit margin percentage 44

Forecasting your profits and losses 45

Worksheet 5 Creating your own forecast profit and loss report 46

Chapter 6 Introducing VAT 49

What is VAT and how does it work? 50

When do I register for VAT? 51

Your accounts and VAT 52

Cash flow and VAT 52

Worksheet 6 Checking your understanding of VAT 49

Some rules about VAT 54

Chapter 7 The difference between cash and profit 55

The basic principle of cash versus profit 56

Accounting for things when they happen 57

Worksheet 7 Accrual accounting 58

Understanding depreciation 59

Chapter 8 No one goes bust with money in the bank 61

Monitoring your cash flow 62

Understanding the cash flow forecast 62

Preparing a cash flow forecast 64

Using your cash flow forecast 65

Worksheet 8 Creating your own cash flow forecast 66

Introducing working capital 68

Working capital and your business model 69

Managing working capital 69

Measuring working capital 71

iv Understanding Your Business Finances © Cobweb Information, 2014



Contents

Chapter 9 Balance sheets and accounting principles 73

Principle 1: dual entity 74

Principle 2: assets = liabilities 75

The accounting equation 75

Accounting in practice 76

Worksheet 9 Posting transactions 82

Understanding the balance sheet 83

Chapter 10 An introduction to financing your business 85

Different types of finance 86

What type of funding is suitable for your situation? 89

Sources of business finance 90

Pre- and post-money valuation 91

Worksheet 10 Financing your business 92

When, and if, to take equity finance 93

Approaching a business angel 93

Chapter 11 Day-to-day accounting in your business 95

Computerised accounting packages 96

Who can help you with your accounting? 97

The role of management accounts 98

The role of budgeting and variance analysis 98

Purchase order (PO) systems 99

Key performance indicators 100

Worksheet 11 What do you need to knowto run your business? 101

Chapter 12 Putting all you’ve learned into practice 103

Developing a routine mindset 104

Ideas for your checklist 104

Your business model holds the key 105

Worksheet 12 Your action planner 106

Next steps 108

Jargon buster 109

Also from Johnny Martin 111

Other publications from Cobweb 112

Understanding Your Business Finances © Cobweb Information, 2014 v



vi Understanding Your Business Finances © Cobweb Information, 2014

Who is behind your workbook?

Understanding Your Business Finances is one of a range of business publicationsproduced by a team of small business owners and business information specialists with many years’ experience. They offer first-hand insight into what it’s like to start and build a successful business.

ABOUT THE AUTHOR

Johnny Martin FCA is an experienced finance director. He has raisedventure capital from high profile investors, but also has hands-on experience of the nitty-gritty of small business finance. He specialises in demystifying finance and accounting for business owners.

Johnny passionately promotes financial understanding and has helpedthousands of people overcome their fear of finance. His approach bridges the gulf between business owners and the accountants, bankers and business angels who ‘talk business finance’.

Johnny is a partner at the British Library Business & IP Centre in London, where he runsfinance workshops for entrepreneurs. He has gained ‘High Impact’ awards for the workshops he runs during Global Entrepreneurship Week. He is a mentor at the School ofCommunication Arts in London and is a director of New Venture Consultancy WhetstoneEnterprise Support Limited. He also operates his own self-storage business in Somerset.

ABOUT THE PUBLISHER

Cobweb Information is a leading publisher of workbooks, guides and reports covering the facts, opportunities and trading issues in over 600 small business trades and sectors.

Cobweb’s clear, practical publications are designed to support professionals who coach, train and advise small business owners and start ups.

Its unique range of services is used extensively by business advisers, information professionals,colleges/universities, business support agencies, banks, finance providers and enterprisepractitioners.



Welcome to your Understanding Your Business Financesworkbookand congratulations for picking it up and opening it. When it comes to finance,too many people muddle along and hope somehow things will end up alright.They rarely do!

Why I wrote this workbook

Many people come unstuck when they start a business because they don’t know what the numbers are telling them. Some don’t even have anynumbers to work with! Others manage to get through the early days andcreate a really successful business, only be to be ripped off by a so-calledbusiness partner who is ‘dealing with’ the money’. (And believe me, thathappens a lot.)

That’s why I created this workbook – to make the world of finance andaccounting accessible to everyday business owners, whether running anexisting business or starting a new one. I’m not setting out to turn you into an accountant, but once you understand the numbers, you’ll be much betterequipped to start, maintain and grow a viable and profitable business thatwill provide for you and your family.

Getting the most out of this workbook

By the time you have finished this workbook, you’ll understand your businessnumbers and appreciate how they can help you grow a more profitablebusiness. You’ll also be able to discuss money matters more confidently with your accountant, finance director, colleagues, bank or investors.

This workbook has been written with three key objectives in mind:

1 To pass on as much knowledge as possible, as quickly as possible!

You’ll find out why financial reports are laid out in a particular way andlearn the common terms and conventions. You’ll learn some key accounting principles and get a better picture of how the various pieces of business finance fit together.

Understanding Your Business Finances © Cobweb Information, 2014 1

Welcome



2 Understanding Your Business Finances © Cobweb Information, 2014

2 To boost your confidence and help you trust your gut feeling about your business finances.

You should never be afraid to question ‘experts’ who have never run abusiness themselves. I regularly meet business owners who didn’t trusttheir own judgement and who lost their business as a result.

3 To show you that the numbers are much, much more than the‘score’ at the end of the year.

If you understand the numbers, you’ll have the confidence – and theknowhow – to build and manage a robust, sustainable and profitablebusiness.

The workbook is based on what I’ve learned – from working as a finance director and from teaching hundreds of business people in a classroomsetting. It focuses on what is important when running a business and tacklesthe main areas of confusion, such as why profit isn’t the same as cash.

I recommend that you start at the beginning of this book and work steadilythrough it, so that you build your knowledge step by step. I think that it’smost helpful if we balance ‘what’s important for you to know’ with ‘what’s the best way to explain it to you’.

Each chapter begins by explaining why its subject matter is important andintroduces my BIG IDEA for the chapter, followed by your key learningobjectives. Each chapter concludes with a brief summary or checklist. Use this to make sure you understand the information covered in the chapterand know how to apply it. Within each chapter you’ll also find links toadditional resources.

I’ve set out to explain the principles of business finance in everyday language.Where I’ve had to use ‘jargon’, I’ve highlighted the word and explained itmore fully in the Jargon Buster, which begins on page 109.

Introducing the worksheets

There are twelve worksheets in your workbook, one for each chapter. Theseworksheets contain exercises to test your understanding of the subjectscovered in each chapter. Some ideas and concepts may be new to you andthe worksheet exercises will help fix these ideas in your memory. There areseveral worksheets that will help you create your own financial forecasts.

Some of the worksheets in this book are available as Microsoft Excel® spread-sheets with automatic calculations built in. You may find it easier to use thesespreadsheets. It will save you re-doing the calculations each time you changethe numbers. You will need Microsoft Office® or equivalent software to openand save the documents.





If you bought your workbook from the Essential Business website atwww.essential-business.co.uk, you will find these spreadsheets in youronline account. If you are using this workbook as learning material for a training course, ask your trainer how you can access these electronictemplates.

If you have any problems at all locating the spreadsheets, [email protected].

Your other resources

You will find additional factsheets and guides in your online account. Theseexplain key issues in more detail than we had space for in the workbook.

Your resources include:

Choosing the legal status of your businessl

An introduction to VATl

Completing VAT returns and making VAT payments.l

Bringing it to life

To bring this learning to life, we will be referring throughout to a hypotheticalbusiness, Sam’s Catering Limited, a limited company owned and run bySam.

Sam starts out making ready meals from a small kitchen unit in a local industrialestate. Studying Sam’s business will help you see the practical application of thetheory we are talking about. You can test your understanding in the hands-onexercises. And you can draw on Sam’s examples and anecdotes when you arethinking about your own business. It doesn’t matter if you are starting abusiness or already running one. Looking at Sam’s business will help you graspthe practical side of business finances.

Making a start

You don’t need any specialist knowledge to get started – just dive in andwork through the book at your own pace.

You can do this stuff. It’s still okay to delegate finance to accountants or keymembers of staff, but don’t abdicate the responsibility completely. No one is going to look after your interests better than you.

So, let’s make a start!





What are people saying about this workbook?

“ Reading this book has meant I now understand what management accounts are all about. I am actually looking forward to tracking all the numbers to do with our business and what to look out for! Everything is very clearly set out and explained by Johnny – he definitely makes things feel simple and straightforward. I'm sure I will be returning to different sections quite a few times to remind myself of the best approaches.

Thanks to Johnny and the team for this much needed starter pack on business finance!”Bridget Harris, CEO www.softlysoftware.com

“ This is a fabulous book – exactly the kind of practical manual a new business owner needs. Thank you for giving me the opportunity to review it, I really enjoyed it!”Cyril Picardi ACCA, CEO, SmartFD, www.SmartFD.co.uk

“ This book is fantastic. It contains the all the information you need on management finance. It tookus a long time to get to grip with these things but you have covered them all – even things I thoughtyou might not have, like depreciation and HP loans. Both important in manufacturing set up.

I think you are right to emphasise about ‘the business model’ which is much the hardest thing to work out (and most entrepreneurs like us don’t). Raising finance is much easier in our experience."”James Foottit, ??? Higgidy, www.higgidy.co.uk



When you run a business, you need to keep track of three things:

1 how much cash is in the bank – your balance right now and yourexpected balance over the next 8–12 months

2 your sales income and business expenses

3 what the business owes and what the business is owed.

Whatever the size of your business, all financial management and reportingdepends on you being up to speed with these issues. The information youneed is set out in three key reports:

1 the cash flow forecast, which tracks the flow of cash in and out of thebusiness bank account

2 the profit and loss report, (known as the P&L) which tracks sales andexpenses

3 the balance sheet, which shows what the business owns and owes at a particular point in time.

My BIG IDEA for you in this first chapter is this: the financial management ofa business is much more straightforward than you think. It is really just aboutkeeping track of cash, sales and expenses, and money owed by and to thebusiness.


1 Introducing the threekey financial reports

By the end of this chapter, you will be able to:

understand the contents of the cash flow forecast, profit and lossl

report and balance sheet

appreciate the role and use of each reportl

start building your understanding of business vocabulary.l



The building blocks of business financeWorksheet 1 What do you need to know about your finances?

Let’s get your financial brain fired up.Imagine you are Sam, the owner of Sam’sCatering. You’ve been running the businessfor a while, but don’t feel that you haveenough understanding of how well thebusiness is performing financially.

What would be the most useful information for you to have to help you understand how the business is doing?

Jot down your initial ideas. Throughout this chapter we will be showing you where you will findthis information in your key financial reports.

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Sam currently makes hot ready meals in a productionkitchen in an industrial estate. The food is sold to several contract clients through a variety of outlets.Sam’s business is doing okay, but there is little to differentiate it from the competition…

Introducing SAM’S CATERING

For example:

How much cash is in the business bank account?

What is the total value of weekly sales?

Is the business making a profit?



The key financial reports

The cash flow forecast

A cash flow forecast sets out, month by month, the money you expect tocome into the bank account from sales, and the money you expect to go out of the bank account to pay bills. It shows the amount of cash you expectto have in your bank account at the end of each month.

It’s absolutely essential that you know the current balance of your businessbank account. It’s a good idea to check this every day. You can do this online(or with a smart phone app) with most business bank accounts. Do bear inmind, though, that the balance at the bank won’t include payments (andreceipts) that haven’t yet cleared.

Knowing your bank balance is not enough. Even if there is plenty of cash in the bank, not all this money is available for the business to spend. Thebusiness will have incurred liabilities (in other words, money that it nowowes) in its day-to-day trading. You need a cash flow forecast to see clearlyhow cash will move in and out of the business in the future.

Ideally, you need a cash flow forecast showing the position at least 8–12months ahead. If it looks like your business may run out of money, you thenhave time to do something about it. Both banks and investors hate lastminute requests for finance. If your business is likely to need extra funds,you’re much more likely to get them if you apply well in advance.

When looking at your cash position, you also need to know if you have an agreed overdraft in place and, if so, when it is due for renewal. Manybusinesses are not aware of overdraft renewal dates and get caught out iftheir bank decides not to renew.

You’ll find an example of a cash flow forecast for Sam’s catering business on page 10.

The profit and loss report

Every business must make sales to survive… so you need to examine yoursales figures inside out. Ideally, you should have additional details aboutthose sales – for example, sales by product category and by customer. You can produce these easily using a computerised accounting package. You also need to know your costs to see if your business is profitable.

Sales and costs are set out in a report called the profit & loss report (P&L).The profit and loss report shows the sales and the related costs of makingthose sales, as well as the resulting profit (or loss) for the period. This isusually shown by month and by year.

Bringing it to life


We’ll be returning tothe cash flow forecastin Chapter 8 and we’llalso provide a blankcash flow spreadsheetfor your own use.

DON’T WORRY…

A cash flow forecasttracks money flowinginto and out of thebusiness bank account.

This information isvital for ensuring thatthe business is able to pay its bills as theybecome due.

Why do this??



Information in your P&L helps you compare actual sales with forecast salesand see if your costs exceed your budget. If your business is overspendingor failing to achieve its sales targets, you need to know, and act swiftly tocorrect this.

Here’s an example of how a P&L for Sam’s catering businessmight look. We will be looking at each line of the P&L in moredetail later in Chapter 5.

Bringing it to life



We’ll be looking at theprofit and loss report(including profit beforeand after tax) in moredetail in Chapter 5.

For now, we simply want you to familiariseyourself with the lookand feel of it.

DON’T WORRY…

The profit and lossreport is important for understandingwhether the businessis making enough salesto cover its costs.

Why do this??

Sam’s Catering Ltd

Profit and loss account for the year

Example Profit and loss report for Sam’s Catering

A

B

C

D

E

Year total

Sales

Ready meals 86,600

Total sales 86,600

Cost of sales 28,145

Gross profit 58,455

Overheads

Salaries 40,968

Unit rent 1,200

Unit rates 300

Utilities 900

Cleaning 520

Insurance 650

Office costs 575

Marketing 750

IT 620

Accounting and legal 990

Maintenance 600

Travel 2,850

Bank charges 600

Equipment depreciation 1,156

Total overheads 52,679

Operating profit 5,776

Loan interest 227

Overdraft interest 167

Profit before tax 5,382

Corporation tax provision 1,076

Profit after tax 4,306





Let’s look briefly at some of the terms used in a P&L:

Sales (Total sales)

Sales are the lifeblood of any business. Sales figures show sales of goods andservices; they do not include VAT, sales of shares or cash received from loans.However, they do include any grant a business receives. Sales are recorded in the profit and loss report when goods are dispatched and invoiced. Oftenthis is not when the cash is received or paid. This means that the P&L reflectsactual commercial activity, not the transactions through the bank. This important distinction is explained more fully in Chapter 7.

Cost of sales

Cost of sales usually refers to costs that vary with the level of sales andproduction. These are also known as variable costs or direct costs.

In Sam’s catering business, ready meal ingredients would be a variable cost.

Gross profit

Gross profit is what is left when you deduct the cost of sales from the totalsales. In effect, gross profit represents the value that has been created by thebusiness trading.

For example, in Sam’s catering business, potatoes, onions, meat, and so on, are turned into a ready meal and sold for a lot more than the cost of the individual ingredients.

Overheads

Overheads are the fixed costs of running a business, such as rent, utilitiesand office costs. Fixed costs don’t vary with the level of sales.

Operating profit

Subtract total overheads from the gross profit to get the operating profit.This is also known as EBIT – earnings before interest and tax. Then take off interest and tax to get the profit after tax – known as the bottom line.

The balance sheet

If your business is selling on account (in other words, giving people time to pay their invoices), you need to know how much is owed by yourcustomers as well as how long those amounts have been outstanding. If youpurchase goods and don’t pay for them immediately, you will also need toknow how much your business owes its suppliers.

Bringing it to life

Bringing it to life

Now you can seewhy business numbersare so confusing.Sometimes there ismore than one termfor the same thing.But remember, you can always turn to thejargon buster on page109 for an explanation.

DON’T WORRY…

A

B

C

D

E

To help you decide where your variouscosts go, if the cost is part of making yourproduct or service,then it would normallybe included in yourcost of sales.

Useful TIP

Words and phrasesthat are highlighted in green are beingmentioned for the firsttime in the book andmay be new to you.They are explainedfurther in the jargonbuster on page 109.

Remember





ExampleMonthly cash flow forecast for Sam’s Catering

Sam

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80

7,5

60

8,7

60

9,4

80

103,5

60

Equity investm

ent

receiv

ed

––

––

––

––

––

––

–

Loan/s

receiv

ed

––

––

––

––

––

––

–

Cash

in

flo

wa

9,0

60

9,1

80

9,6

00

9,3

00

8,8

20

8,5

20

8,4

00

7,8

00

7,0

80

7,5

60

8,7

60

9,4

80

10

3,5

60

Cost

of

sale

s (

direct

or

variable

)2,2

09

2,8

28

2,6

00

2,2

76

2,2

42

2,2

10

2,2

75

1,6

25

1,8

20

2,5

35

2,8

60

2,6

65

28,1

45

Wages (

inc P

AYE a

nd N

I)3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

3,4

14

40,9

68

Unit r

ent

270

120

120

120

120

120

120

120

120

120

120

120

1,5

90

Unit r

ate

s30

30

30

30

30

30

30

30

30

30

30

30

360

Utilities

120

90

90

90

90

90

90

90

90

90

90

90

1,1

10

Cle

anin

g m

ate

rials

56

52

52

52

52

52

52

52

52

52

52

52

628

Insura

nce

56

54

54

54

54

54

54

54

54

54

54

54

650

Offic

e c

osts

56

58

58

58

58

58

58

58

58

58

58

58

694

Mark

eting

68

76

76

76

76

76

76

76

76

76

76

76

904

IT58

62

62

62

62

62

62

62

62

62

62

62

740

Accounting a

nd legal

62

100

100

100

100

100

100

100

100

100

100

100

1,1

62

Repairs m

ain

tenance

60

60

60

60

60

60

60

60

60

60

60

60

720

Delivery

vehic

le (

runnin

g c

osts

)278

286

286

286

286

286

286

286

286

286

286

286

3,4

24

Bank c

harg

es

60

60

60

60

60

60

60

60

60

60

60

60

720

Capital expenditure

––

–900

––

––

––

––

900

VAT R

etu

rn p

aym

ent

(receip

t)3,6

04

––

4,1

21

––

3,7

89

––

3,3

79

––

14,8

93

Fin

an

cin

g

Loan r

epaym

ent

43

43

44

44

45

45

45

46

46

46

47

47

541

Loan/o

verd

raft

inte

rest

21

53

43

31

42

32

23

33

25

24

37

30

394

Corp

ora

tion t

ax

––

––

––

––

441

––

–441

Cash

ou

tflo

wb

10

,46

57

,38

67

,14

91

1,8

34

6,7

91

6,7

49

10

,59

46

,16

66

,79

41

0,4

46

7,4

06

7,2

04

98

,98

4

Net

cash

in

flo

w (

ou

tflo

w)

c=

a-b

(1,4

05)

1,7

94

2,4

51

(2,5

34)

2,0

29

1,7

71

(2,1

94)

1,6

34

286

(2,8

86)

1,3

54

2,2

76

4,5

76

Ban

k b

ro

ug

ht

forw

ard

d(4

,959)

(6,3

64)

(4,5

70)

(2,1

19)

(4,6

53)

(2,6

24)

(853)

(3,0

47)

(1,4

13)

(1,1

27)

(4,0

13)

(2,6

59)

(4,9

59)

Ban

k c

arrie

d f

orw

ard

e=

d+

c(6

,36

4)

(4

,57

0)

(2

,11

9)

(4

,65

3)

(2

,62

4)

(8

53

)(3

,04

7)

(1

,41

3)

(1

,12

7)

(4

,01

3)

(2

,65

9)

(3

83

)(3

83

)

This example may feela bit overwhelming atfirst glance, but by thetime you’ve reached theend of the book, you’llunderstand how it allworks and fits together.


DON’T WORRY…




The balance sheet report sets out details of what the business owns (its assets) and what the business owes (its liabilities). It shows:

Assets Items owned by the business such as equipment (known as fixed assets), stock, money owed to the business by its customers (known as debtors), and money in the bank.

Liabilities Liabilities include money owed by the business to its suppliers (known as creditors), any overdraft or loan owedto the bank, money owed to HM Revenue and Customs(HMRC) for income taxes, VAT and, perhaps, corporationtax. Liabilities also include profit owed to the shareholdersand any money invested in shares.

Here is an example of a balance sheet for Sam’s catering business:Bringing it to life


We’ll be looking at thebalance sheet report in much more detail in Chapter 9.


DON’T WORRY…

Example Balance sheet for Sam’s Catering

Sam’s Catering Ltd

Balance sheet at year end

Year end

Fixed assets (equipment) 2,598

Current assets

Stock 2,437

Debtors 11,500

Bank and cash –

VAT –

Sub-total 13,937

Current liabilities

Creditors 3,138

Bank and cash (overdrawn) 383

VAT (due) 3,799

Corporation tax (due) 1,076

Sub-total 8,396

Net current assets 5,541

Long-term liabilities

Loan 1,969

1,969

Net assets 6,170

Capital and reserves

Retained profit brought forward 1,764

Profit for the year 4,306

Retained profit carried forward 6,070

Share capital (owner’s equity investment) 100

6,170

The balance sheetshows what thebusiness owns andowes at a point in time.It highlights if thebusiness may have a problem meeting its debts.

Why do this??

Keep an eye on youronline account whereyou’ll find various tools and resources.They contain more information to helpyou understand themore complex parts of business finances.

Remember




And just so you are aware, investors and banks look at balance sheets to helpthem analyse financial risk and answer questions such as:

Can this business meet its short-term payments? l

Has the business borrowed too much money?l

Have the shareholders left enough cash in the business or taken too muchl

out in dividends?

We will discuss investors in more detail in Chapter 9 and show you specificallywhat numbers they are looking at.


CHAPTER SUMMARY

It’s vital to know how much cash is in your business at a particularl

point in time.

Financial reporting needs to cover cash, profit, assets and liabilities.l

Cash is monitored in the cash flow forecast.l

Income and expenses are set out in theprofit and loss report.l

Assets and liabilities are shown in the balance sheet.l

Banks and investors like to review balance sheets because theyl

help them identify financial risk.

These three key reports are explained in greater detail later in theworkbook. Next, we will look at the term ‘business model’ andexplore how this is the key to creating a viable business.



Xxxx

Understanding Your Business Finances © Cobweb Information, 2013 111Understanding Your Business Finances © Cobweb Information, 2014 111

Also from Johnny Martin

If you have found this workbook useful, you may be interested in some of my other

products which are available from my website www.johnnymartin.co.uk:

TALK MONEY

Talk Money is a 90-minute web-based video that is broken down into three main sections

covering profit and loss, cash flow and balance sheets. Each section is made up of bite-

size chunks of learning explaining all the essentials of the three key financial reports —

after watching this video you won’t be caught out by the Dragons!

“Thank you very much for the connection to your film. It is really very good and I agree

with you about the necessity for training people to understand this stuff by taking the

mystery out of it. To be honest there are a lot of people who are already supposed

to be in business who could use a simple refresher on many of these points.”

Tim Smit, Founder, Eden Project

BUSINESS PLAN TEMPLATE

This ready-to-use Word document will save you re-inventing the wheel when it comes

to producing a business plan. There is a commonly-accepted format for business plans

that investors expect to see — so this template will help you get off to a good start.

Complete with index, cover sheet, executive summary and section headings, once

you’ve completed your plan you’ll be ready to start pitching. This template has been

used successfully by early-stage businesses to raise £100,000s of investment.

FINANCIAL FORECASTING TEMPLATE

This template will help you start thinking about your business idea in financial terms

and help you answer the question: How do I create a viable business model? Made up

of a number of tabbed spreadsheets, starting with a personal budget, and ending with

a five-year profit and loss forecast, cash flow and balance sheet. Each stage is carefully

explained and there is also a breakeven calculator and sensitivity analysis tool. A model

like this would cost £500–600 from a firm of accountants and it will give you all the

numbers you need for your business plan.

“It goes a long way really quickly.”

Nigel Biggs, Entrepreneur in Residence, University of Surrey

WORKSHOPS AND 1:1 TRAINING

For information about workshops and one-to-one training and to make contact,

visit my website www.johnnymartin.co.uk.




Other publications from Cobweb

THE ESSENTIAL BUSINESS GUIDE

The Essential Business Guide is a user friendly

reference manual packed with information about

running a business. It is an ideal companion to

Understanding Your Business Finances.

The Guide is full of additional, practical information on

a whole host of subjects, including business planning, marketing,

legal, IT, employment and managing your business.

The Essential Business Guide also includes many additional resources that provide

you with more in-depth information to help you run your business. Find out more at

www.essential-business.co.uk/guides.

PLANNING AND STARTING YOUR BUSINESS

Designed in the same style as Understanding Your Business Finances,

the Planning and Starting Your Business workbook guides you through

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Find out more at www.essential-business.co.uk/workbooks.

BETTER BUSINESS

Better Business is a bi-monthly subscription-based journal full of practical tips, ideas

and know-how for independent business owner-managers, freelancers, consultants and

business advisers. To subscribe, go to www.better-business.co.uk

SMALL BUSINESS GUIDES AND FACTSHEETS

Cobweb’s Business Opportunity Profiles provide market information and details of the

key trading issues for over 300 different types of business and our Business Information

Factsheets cover all aspects of starting up and running a business.

All these factsheets are available to buy from our business information superstore at

www.scavenger.net



Xxxx

Understanding Your Business Finances © Cobweb Information, 2013 113113 Understanding Your Business Finances © Cobweb Information, 2014




An ESSENTIAL BUSINESS workbook

Cobweb Information Ltd

Unit 9 Bankside

The Watermark

Gateshead NE11 9S

T 0191 461 8000

E [email protected]

W www.cobwebinfo.com

Johnny Martin Business Education Limited

20–26 Brunswick Place

London N1 6DZ

E [email protected]

W www.johnnymartin.co.uk



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