Understand Finance to Make Your Business Worth More
Posted by Christine
2 January 2024
“ACCOUNTING – is possibly the most boring subject in the world. And it is also one of the most confusing. But if you want to be rich, long-term, it could be the most important….”
I’ve been working with entrepreneurs and business owners for many years. One of the most common themes is either the fear of numbers in general or lack of understanding of the numbers in their business. Most commonly it’s both.
Many people think that numbers are difficult, like a foreign language. Accountants often charge very high fees for their services. They get away with it because the mechanics of accounting is poorly understood by business owners.
Many business owners believe that having more advice and support from their accountant increases costs but offers no added value to their businesses. This is especially true of larger corporate practices that need to cover higher overheads from a large workforce with high salaries and posh offices.
Many small business accountants are, at best, passively billing fees for doing the bare minimum of statutory services (tax returns and statutory accounts).
“Finance is very simple, but it’s made to look complicated to justify the fees.”
There is a “language” used, an unusual and often unnecessary vocabulary to describe the financial activities of the business. Most accountants are not very entrepreneur friendly. This can be off-putting for non-finance people.
But not all accountants are the same. There is a new breed of accounting practice emerging that puts the businesses they support at the heart of the services they offer. They are much more commercially focused than the traditional tax-orientated accountants of the past.
Driven by advances in technology, proactive accountants are providing regular financial reports. They are giving growth advice and working in collaboration with the business. And they provide essential annual accounting and tax services.
This article aims to take foreign language and turn it into a layman’s view of the most basic aspects of finance. It shows you how your business numbers work so you can understand them more easily and be more confident about your business finances.
If you’re reading this then you may have been attracted by the title, intrigued by the “five minutes” claim to understand elements of finance in your business. Principally this article is for those with no time and who do not understand finance!
If you are a business owner and you have less than a full understanding of your accounts, or you think you know, but you are not sure (and you do not want to look foolish by asking a daft question) then read on.
If you have been thinking of starting your own business and have not gotten it going yet because fear of finance is stopping you or blocking you, then this is also for you! It will help remove one of the barriers that may be in the way of you taking the leap forward, improving your understanding of the basic financial aspects of business.
If you have a job and are involved in controlling budgets, or in meetings where the finance language that is used is something that you don’t understand. Or you’re too afraid to ask the questions, then you are in the right place and will get a good kick start to become more confident in basic finance. It will allow you to have a basic understanding, so that you can start asking the right questions without the fear of being made to look stupid.
I’ve been a qualified accountant for 20 years and have been lucky enough to have gained most of my experience in family owned and entrepreneurially led businesses.
Having worked in a lot of different industry sectors and roles from Managing Director, through Operations and Finance, I can safely say I have seen most of the business outcomes possible, from start-ups through the full spectrum of business difficulties including liquidations and closures.
In 2002, I set up my very first “proper” business (I’ve been finding a way of making money since my pre-teen years!), taking it from zero to a turnover of £4.5m in less than three years. Through that period, I was acquiring other businesses from business owners who didn’t understand how to extract more value from their businesses. Most didn’t have clarity on their numbers, with many barely understanding what their profitability was. It made it very difficult for them to plan growth or even to understand some of the risks that they might have been taking.
Many of these businesses were stuck in low-profit doldrums and couldn’t see a way out other than to sell their enterprise for less than they planned or dreamed of.
Since selling my first business (it’s still going strong under new management!), I’ve worked with other entrepreneurs helping them grow, change, and sometimes exit their businesses. Along the way showing them how to understand their numbers and the factors that drive the cash – resulting in sustainable growth and often a full or partial (and high value) sale of their businesses.
It has been an interesting and varied journey, and I would like to share with you some of the knowledge to help you overcome a fear of numbers and start to understand how to use numbers in your business for better decision making. So – let us dive in…..
To de-myth and de-mystify some of the language in finance, I thought it was worth starting with one very commonly misunderstood term! The TRIAL BALANCE. One of the most common ways of referring to a company’s accounting data is the TRIAL BALANCE (sometimes referred to as an extended trial balance). It is a book-keeping term. The TRIAL BALANCE is a list of the account entries in summary that when all the credits and debits are added together, they add up to zero.
Just for the avoidance of doubt, every transaction in business has TWO parts – and equal and opposite debit and credit. A trial balance is the start of a company’s accounts, but it is not a financial statement and is a purely internal check that all the transactions of a company’s accounts are recorded correctly. It is called a trial balance because when all the transactions are recorded through double entry bookkeeping, the list of debits and credits should always add up to zero!
The list of entries in the trial balance are split into items recorded in the PROFIT AND LOSS STATEMENT or the BALANCE SHEET which make up the company’s financial statements.
Don’t worry about the numbers just yet. This trial balance shows that the accounts all add up to zero and where each part of the Trial Balance appears in the Financial Statements.
Within a business, all the numbers come together at least once a year when you prepare the year-end accounts which, for most people, is an inconvenience resulting from the legal requirement to complete a tax return!
As a business owner, you will typically hand over all the accounting paperwork to an accountant, who you only see once a year. Twice if they are renegotiating their fees! If the business is larger or growing, you may have a book-keeper who is using some cloud accounting software or an accounting system.
It is possible that you literally hand over a bag of receipts to your accountant! Certainly, for many sole traders, this is one of the most common scenarios that I hear about from some of my colleagues who are practice accountants.
So, once you have sent all the business transaction data to your accountant at the year-end, after a few weeks or months they will send you the FINANCIAL STATEMENTS (if your company is Limited) or your TAX RETURN (if you are a sole trader) for your previous financial year.
For a limited company, the financial statements are required to be in a defined format specified by the Companies Act (a legal requirement).
The financial statements are the culmination of all the financial information in your business, and they’re important because they tell you exactly what profit you made and how much tax you are expected to pay in the next year.
They tell you where you have been and how you have done, but they are not telling you where you’re going. Typically, you will get them between four and six months after your year end, just in time to make the tax payment to HMRC!
Of course, this is far too late for you to use the numbers for effective decision making because you are halfway into the next year. Without accurate and timely accounts, it’s a challenge for you to know exactly what your business financial position is, such as:
You might have a good gut feel for the numbers in your business, but unless you understand the rhythm of your spending, the pattern of your receipts and the relationship between your profit and the flow of cash you will not be able to make informed decisions about the future of your business.
How Understanding Finance Makes Your Business Worth More
As your business grows, understanding the numbers becomes more important as the risks you are exposed to increase.
The key financial statements are:
They’re all important because they tell you different aspects of your business. This is just the start of the learning journey. The key question is “How confident, on a scale of 1 to 10, are you in your numbers?” If it’s a low number, would 5 Minutes a day be a good use of your time to get more comfortable?
Christine Nicholson is an author, speaker and multi-award-winning Professional Business Mentor who works with multi-million turnover business owners of technology, engineering or product / services businesses. She’s even appeared on BBC talking about business! This article is an extract from her critically acclaimed book “5 Minute Finance”.
Is your business saleable and exit ready for you to leave it (no matter when it happens)? Click to to get Christine’s free Exit Ready Checklist the expert in making sure your business is saleable for more money and on better terms. Christine helps you get out of the day-to-day, guides you through the handover of controls and gets you and your businesses exit ready so you can enjoy a happier, richer future. She saves you THOUSANDS so you can increase the value of your businesses by MILLIONS.
