The Financial Health of Your Business At a Glance – Part 1
Financial Health – Part 1
We’re developed a couple of articles to help with your understanding of the “ins and outs” of financial management for your business.
It’s all very well checking the firm’s online bank statement but proper records are vital for an understanding of the financial health of the business, both now and in the future. And talking of the future, planning for the future is critical, especially in these Covid-19 times.
Our focus, as your certified chartered accountant, is to reduce stress levels by giving you an understanding of the various financial tools that are essential for the long-term viability of your business.
1. In the Beginning – Planning for the Future
Most firms have a budget (forecast) looking to the amounts of money the organisation expects to spend and earn during the year. Hopefully the budget for next year will show a profit by year end, if not for most months. But wait a moment, you cannot create a realistic budget, if you have not taken the time to work out the business opportunities over the next financial year. This is where you need a business plan.
Firms need a business plan more than ever thanks to the economic and political uncertainties induced by Covid-19. Lockdowns, intense capacity constraints, staff shortages and associated retention problems, costs are on the increase.
A business plan encourages managers to lift their collective heads from the day-to-day running of the business to consider the next 12 months or so: to consider what will the future look like, how to respond given your long term objectives.
Just how does the organisation intend to attract and retain customers? What are the operational and financial aspects of doing this? How will the firm respond to a changing market, where businesses offer new and different products and services? How much capital expenditure is required? What are your borrowing requirements?
Time spent on creating a business plan, with its associated budget, (prepared on a cash basis) is time well spent.
Like a hand tying the budget to the business plan, please do give me a call on:
Ben 022 043 1199
2. Is Your Bank Statement Enough?
We all know what a bank statement looks like. But is it enough when it comes to the health of your business?
The bank statement shows the actual amounts of cash spent and received on a daily basis. A cash flow statement (to use an accounting term) is similar, although it presents income and expenditure by activity on a monthly basis. Note, the planned amounts shown on a cash flow statement come directly from the budget and the actuals from aggregated information contained in the bank statements. The difference between planned and actuals is shown as a variation.
If you are a small firm or even a solopreneur then the cash flow statement is probably sufficient. After all, being a small company you know when the big payments are due and likewise, when large lumps of income will be paid.
But wait a moment. What if you are a bigger organisation and you don’t have a handle on your cash flows or rather you’re not sure about the impact of those lumpy payments on your cashflows. Will they impact on your ability to make payments on time (and IRD waits for no one), without the need to drawdown on your overdraft facilities. What then?
Let me introduce you to the concept of accrual accounting which records when an invoice is sent or received as in when a sale or purchase is made (as opposed to when it is paid, which is what the cash flow statement is about).
No Need To Wait
Our next article will address this very topic along with a look at the balance sheet which captures the financial details off every thing the firm owns or owes. Give me a call to talk about particulars (Ben 022 043 1199). The first consultation is free, client or not.
Contact us today for an initial, free consultation about how to migrate your accounts to a cloud based accounting service. It’s what we do.