5.2 Essential accounts
You might be very comfortable with figures and have the skills to complete the monthly accounts yourself. But you may well not be so comfortable with this side of the business. It is important, however, not to shy away from the numbers. They tell a story about how your business is faring. They tell you which initiatives or actions are working and which are not.
It is a good idea to be personally involved in the production of the cash-flow forecast and profit-and-loss statement. You may choose to employ a bookkeeper or accountant to prepare the accounts for you, but it is imperative that you understand them. This responsibility cannot be delegated.
The purpose of this section is not to teach you to be an accountant or how to keep your books. The focus is on developing an understanding of how to track and use financial information in the management of your business.
We will look at four statements that you will need to be familiar with and understand when running your business. These are:
- cash-flow accounts
- profit-and-loss accounts
- the balance sheet
- budget statements.
Each one of these financial statements is needed by any company. They each serve a different purpose.
Task 32: Defining financial statements
Match the different definitions to the different financial statements.
Using the following two lists, match each numbered item with the correct letter.
Cash flow accounts
a.This statement presents targeted or planned figures against actual results. It highlights the variance between this year’s figures and those achieved last year or between what is actually achieved against the planned figures.
b.This statement reflects how much cash will be, or has been, spent (it also looks at when it will be, or was, spent).
c.The focus of this statement is on the revenue that the company generates and the expenses it consumes over a period of activity.
d.This statement shows the sources of funding coming into an organisation and the fixed and current assets – the resources – it is funding at a particular moment in time. (This is sometimes called the financial position statement in the United States.)
- 1 = b
- 2 = c
- 3 = d
- 4 = a
So, we know what each statement is designed to do for us and we will explore them further through the use of a case study example, Catterline, which is a fictional firm based on a real business.
This section relies heavily on the use of spreadsheets. (If this is a skill you do not yet possess, it may be worth investing in a short course as use of spreadsheets is a very useful skill in running any business.) We talk about Excel here which is a common spreadsheet programme. However, free alternatives likeare just as good. Take each section slowly, take a break and come back to it afterwards, but it is really important that you do complete this section if you are to launch your company.