Many new businesses part with a significant amount of money for their annual accounts - only to find that they don't really understand what they mean. Here are ten tips to help your small business.
1. Balance Sheet
A balance sheet simply summarises a company's financial position at a specific point in time. It's called a balance sheet because the value of a company's total assets has to equal its liabilities. At first glance this seems confusing - but all it's really saying is that the assets owned by the company are balanced up by money owed elsewhere, to its owners and to its profit account.
2. Profit & Loss Account
This 'does what it says on the tin' - it basically summarises the total sales (turnover) and the costs of making those sales. You then end up with an amount which represents either a profit or a loss.
3. Operating Profit/Loss
You get this from the Profit & Loss Account. It's simply the money made by the company, less the costs of making it. If you making the most of any spare cash in your company, you may then find that your actual profit is boosted (or your loss reduced) by things such as interest earned from your company's bank account.
4. Fixed Assets
Fixed assets are assets the company owns which cannot be easily turned into cash. Examples include land, buildings, machinery and equipment.
5. Current Assets
Current assets are assets which the company expects to be able to turn into cash reasonably quickly - usually a year or less. Examples include the balance of any cash accounts, inventory or short term investments.
6. Intangible Assets
Intangible assets are things of value to the business which are not physical objects - usually the value of these types of assets is pretty subjective. Examples include copyrights, patents, trademarks and franchises.
7. Debtors and Creditors
It's easy to get these two phrases around the wrong way. Debtors are people or organisations who owe the business money. Examples include outstanding fees owed to the company. Creditors are people or organisations who are owed money by your business. Examples include outstanding invoices owed to your suppliers. Remember that if it is your business you are also likely to be a creditor - the business will owe you the capital you've lent it to get going.
8. Depreciation
Many fixed assets have a limited useful life. Depreciation is the process by which they are gradually written off in your accounts. For example, if a fixed asset valued at £10,000 is deemed to have a useful lifespan of 5 years, it will typically be written off at £2,000 each year.
9. Dividends
Most people will be comfortable with the idea of dividends - these are simply a share of the company's after-tax profits paid out to the company's owners as a return on their investment. Paying out profits as dividends to owners can be more tax efficient than drawing a higher salary. Get some professional advice to make sure you are making the most of the money the company is earning.
10. Retained Earnings
Retained earnings are the company profits which are not distributed to shareholders as dividends. In other words they represent the company profits, less any dividends paid. Most companies usually retain some profits to help them through difficult times.
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