Accounting for Entrepreneurs
August 2007 (NCGE)
No business plan is complete without a number of anticipated (and, if the business is already trading, actual) financial statements.
The most important of these are:
• Anticipated Profit & Loss Account for at least the first year of trading
• Anticipated Balance Sheet for at least the first year of trading.
• Cash-flow projections for at least one year, and normally for 3 years, together with some sensitivity (what if…..?) analysis.
In addition, it is advisable to understand some basic ratio analysis, in order to understand the financial aspects of the process of due diligence if you are hoping to interest an investor in your business.
Basics1. What you, as the entrepreneur, earn as revenue from sales is not for your personal use. This money belongs to the firm.
2. Sales revenue has to have costs and expenses deducted from it. ONLY THEN, providing that there is something left over which we call profit, can you take your personal drawings or salary from the firm.
3. Money, hopefully (- you might have to remind your customers about this!), comes into the business regularly as you receive payment for the invoices you have issued. Bills also come in regularly for goods or services which you have purchased and have to be paid. This balancing act between what comes in and what goes out is called your Cash Flow.
4. Cash is king. Your business may make profits on paper, but if you haven't got any money, you will not be able to survive long enough to realise those elusive paper profits.
5. Keep accurate records of all monetary activities. Be well-organised: set up computerised systems for recording and filing details of customer orders, customer (debtors) invoices (for money which they owe to you), suppliers (creditors) invoices (for money you owe to them) and for invoices which have been paid. File all your business bank statements in chronological order. Make sure all cheque book stubs and paying in book stubs are filled in.
6. Monitor your bank account regularly and compare actual income and payments on a monthly basis with anticipated income and costs from your budget or Cash Flow Projection (a spreadsheet showing forecast monthly sales and costs - click here for an example of a Cash Flow projection for a small firm).
All businesses have to produce a set of accounts at the end of their financial year. Limited Companies are required by Law to file their accounts at Companies House. Partnerships and Sole Traders are required to submit their annual profits to the Inland Revenue for taxation purposes.