I haven’t firmly decided yet whether after graduating I’d like to work in advertising or start my own company accounting is something I’d like to have a grasp of. If I decide to start a company I’ll need to file accounts every year even if I’m not doing that great and they’re pretty empty. On the plus side, filing a ‘poor’ account is the less demanding. I’d probably would get away with filing just a balance sheet. However, large public company, like BT Group, must file vast amounts of information – reports its accounts every three months (that’s for the stock market).
Accounting is extremely important to find out what’s really going on with your business beneath the surface. It’s like that iceberg that smashed Titanic where only a tip of it is visible from, and the bit that hit it was underneath. I’d like to avoid a fatal hit , thus I’m introducing three accounting statements:
3) Profit & Loss (P&L)
Think of a balance sheet as of a photograph on a particular day – it has a date and shows a picture of a business for that particular date including company’s assets and liabilities. Simon Hulme, business angel and management consultant, reveals that this sheet is quite often ignored by entrepreneurs, nonetheless it is very important and can be used as a powerful tool. Mr. Hulme says he’d be able to tell the health of a business just by looking at the balance sheet.
P&L statement is more like a video – it shows a performance of a company over a period of time. Typically companies do P&L statements on a monthly basis for internal and annul basis for legal reporting requirements. The reason why we produce P&L statement is to see clearly and understand what’s happening with a company from the profit point of view. There’s a net profit and a gross profit. Gross profit comes directly from the sale of the product or service before overheads, whereas the net profit is the profit made after all other cost such as labour, rent, utilities etc. hence, some of the costs are fixed and some may vary.
Cash flow statement – as the name suggest it shows the flow of money coming in and out of the business bank account, and although it is very closely related to the P&L, it is different.
All of these statements are interlinked. Let’s explore how useful these statement are in reality. For example you go to a Vauxhall Car Centre and you buy a car for a company for £10k. The Cash Flow statement shows that amount of cash leaving the company’s bank account the day of purchase of the asset. The Balance sheet doesn’t change in value, however, the make up of it does: there is £10k less in the account, but there’s a new asset worth the same amount of money. This new asset didn’t bring any loss nor profit to the company, and yet it is recorded in P&L. How? That’s because of depreciation. The asset will depreciate X amount a month which will be charged on P&L statement taking into an account the declining value of that car.
If decide to go down the path of a successful entrepreneur I really should master these three ‘laws’ and understand them backwards – accounting offers an in-depth insight into a business. And referring even further back, one the Dragon’s did say: “Devil is in the Details”.
Although it’s not an accounting statement, there’s a fourth just as an important ingredient in increasing chances to become a successful entrepreneur. That ingredient is ratios. Ratios help to determine a relationship between figures and conclude them as good or bad. Moreover, ratios can prove to be useful in the context of one relative to another.
The statements I discussed above are, of course, very basic, nonetheless, they’re very useful and will be implemented within our startup company. And although it’s called ‘finance’ it doesn’t have to be super difficult and boring. After having a class of finance these spreadsheets are common sense seem to be mainly common sense. I might even have some fun doing them.