Do you know the difference between your P&L and your balance sheet? If not, we’ll get you up to speed on all the basics of company accounting. Bookkeeping, accounting, and sound financial practices don’t always come easily to new business owners, particularly if it’s a start-up. However, the sooner you grasp the fundamentals, the more control you’ll have over important business decisions, improving your chances for long-term success.
Following is a guide to the most common accounting and bookkeeping terms and what they mean to your new business.
Revenue and cash inflows
Revenue is the gross income generated from normal business activities. The total amount of sales is the top-line (or gross income) from which costs are deducted. The net result after deducting expenses from revenue reveals your net income. In short, revenue is the amount of money the business generates through all its sales activity.
Revenue can be derived from a variety of sources. These sources are known as revenue streams.
Revenue streams may be:
- Product sales
- Revenue from goods you sell or services you offer
- Income from business assets such as rental properties or hire equipment
- Income from intellectual property you own (like original artwork, patents and inventions)
Having several revenue streams is helpful to spread your income generation across multiple zones and cushions the blow if you were to lose one of your income streams.
Expenditure and cash outflows
Expenditure refers to payments you make to purchase goods and/or services. As this is money flowing out of the business, it’s important to monitor your outgoings carefully to ensure you’re not spending more than necessary. The lower your expenses, the higher your profits, provided your sales are higher than your expenses.
Expenditure may include:
- Supplier bills
- Payroll and staff expenses
- Operational overheads; rent, power, phones etc
- Raw materials and goods purchased for business operations
Profit and loss statement
Your profit and loss statement (P&L) is an essential financial report to understand from the outset. The P&L summarises your revenue and expenses for a set period, usually for the month, quarter, or financial year, not to be confused with cash flow. Your P&L gives you a breakdown of the; revenue, gross profit and net profit the business achieved during the specified period within a financial year. Using your P&L report, you can compare periods with each other (month vs month, quarter vs quarter, year on year) to see how your business is performing.
A profit is made when you generate more sales revenues than outgoing expenses. For your business to be financially viable long term, your business model must be able to generate profit. Without making a profit, you cannot reinvest back into your company and continue to build your business. Profit is critical for driving business growth. Without profit, the only way to continue in business (long term) is through an injection of capital. Ultimately your investor/s (even if that is you) will expect a return on their investment, so the business must have a plan to achieve profitability.
Your cash flow statement is another vital tool to help keep track of your business financials as it clearly expresses the cash inflows against the cash outflows.
To ensure your business maintains an appropriate level of funds, your cash inflows must outweigh your cash outflows. This is referred to as being in a ‘positive cashflow position’, and it’s a level of financial health at which every new business should aim.
By tracking the inflows and outflows and projecting them to create cash flow forecasts, you can move forward with your business, knowing there’s an ample supply of cash to get you through the leaner times.
Other accounting and bookkeeping fundamentals
Following are some additional financial terms to understand for your new business:
- Turnover = total sales revenue made during a specific period. Turnover is also known as gross revenue. It is the sales figure before deductions are made.
- Assets are items you own in the business, such as equipment, property, intellectual property, and cash.
- Liabilities are what you owe to creditors, such as supplier bills, tax debts, accrued leave entitlements and loans.
- Balance Sheet provides a snapshot of your assets, liabilities (current and long-term), and equity as at the end date. Unlike a P&L, your balance sheet reports on the health of your business since its inception.
- Working capital refers to the liquid assets you have in the business that keeps the company operational and trading on a day-to-day basis.
- Funding brings additional capital into the business, usually in the form of business finance products like loans, private investment from outside sources, or personal capital injections.
- Credit score is a rating given to the business representing the company’s financial health and risk level. The higher the score, the lower the risk, and the easier it will be to access funding.
Remember that it takes time to fully understand your business finances and develop your financial literacy skills. However, with support and guidance from qualified bookkeepers and accountants and careful business report management and monitoring, your business will have every chance possible of exponential growth and success.
Do you need help understanding your business financials? Contact Numble today for a comprehensive chat about how to make sure your new business starts off on the right track.