RBS Business Banking | Understanding the basics of business finance

Balance Sheets


What is it?


A tool used to assess the performance and health of your company.

Why is it important?

Basically it shows where the money came from and where it is now in your business. It is a snapshot of the productive assets the business owns such as stock or cash and the debts of the business.
You will hear the term ‘double entry’ in relation to business accounting. It means that for every change on one side of a balance sheet there must be a corresponding change on the other side. In other words, it must always balance.

Where can I get help?

An accountant will be able to help you with this or even do it for you at a fee. 

Your profit and loss account


What is it?

A trading account spanning a period of time, usually a year. But it can be monthly and cumulative. It typically shows receipts from sales, payments for instance to buy materials or stock and overheads such as wages, utility bills etc.

Why is it important?

It shows how the revenues (money received from the sale of products and services before expenses) are taken out and transferred into the net income (the result after all the revenues and expenses have been accounted for).

There are two types of profit, gross which is the difference between revenue and the cost of making a product or providing a service before deducting overheads, payroll, taxation and interest payments. Net profit is the money left over after paying all the expenses of an endeavour.

Sales revenue, the money or assets received from the sales of the company products is what any potential investor will want to see. It is difficult sometimes to predict accurately the forecast and as such you need to take into account many factors such as the total market for your goods or services and what competition you have.
 

Return on Investment (ROI)


What is it?

The ROI is the gain made from investment minus the cost of the investment. The resulting figure is usually expressed as a percentage or ratio and demonstrates the profit made from an investment.

It can refer to the business as a whole, a part of it or a product or service and seeks to define the profit made from a business decision.

Why is it important?

The ROI figure is usually derived from understanding assets and liabilities of the company. There are 2 types of asset, fixed which are long term possessions such as computers, buildings etc. and may include intangible assets such as trademarks and brand names. Current assets are short term assets such as stock, money owed to you from trading activities and their value can fluctuate from day to day.

Liabilities are what the business owes. They are usually either loans used to finance the business and short term debts or money owing as a result of trading activities. They can include money owed to suppliers, loan repayments, overdrafts or taxes.
 

What to do next

• Your local business banking advisers will be able to give basic guidance about financial planning, as should Business Link advisers.
• If you are looking for a reputable accountant to help you with your accounts there are two main bodies in the UK that you can contact. The Institute of Chartered Accountants in England and Wales and the Association of Chartered Certified Accountants both run training courses for accountants and those who pass will have the letters ACA or ACCA after their names.

 

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