Archive for the ‘Accounting/Taxation Information’ Category
Balance Sheet Basics – A Beginners Guide
Whatever your reasons for looking at a business’ balance sheet, whether you are planning to buy it, invest in it or simply buy a few shares, there is little point in having this incredibly important document in front of you, if don’t have the first idea what you are looking at.
A firm’s balance sheet is like a snap shot of its fiscal status, and will tell you everything you need to know about its current financial health; it contains information on all assets, debts, investments and the net worth of a company and so can provide a far better insight as to how it has been performing than a mere profit report can, pretty useful if you are planning to part with your hard earned cash.
A balance sheet will list a firm’s assets, liabilities and the shareholder’s equity and is based on the simple equation that a firm’s net worth or ‘equity’ must equal its assets minus its liabilities.
The assets on a balance sheet will typically be split into two categories, namely ‘current’ assets and ‘fixed’ assets or less commonly ‘financial’ and ‘non-financial’ assets. ‘Current’ assets are cash and the likes of receivables that can be converted into cash quickly i.e. within a 12 month period and ‘fixed’ assets will typically include land, buildings and plant machinery and are classified as those assets that cannot be quickly converted into cash or with take longer than 12 months to do so.
The Liabilities part of the balance sheet will list everything owed to others by the company in question; they are usually also divided into types, and will most usually be listed as ‘current liabilities’, referring to those that must be paid quickly, again, within the year, and ‘long-term’ liabilities those debts that are not due immediately and can be paid back over a longer period than 12 months. Sometimes liabilities are further categorised into more detailed sub categories and may include ‘provisions’; ‘provision’ is a term used when a company allows for an expected expense and in terms of a liability will typically refer to something like employee pay.
The final category of ‘Equity’ shows a firm’s net worth, the total of a firm’s profit and its reserves and should of course be the difference between the assets and the liabilities.
Once you understand the various language used and have familiarised yourself with the typical variations around, most balance sheets are very much the same, bar of course, the figures involved, but they are probably the single most important overview of a company one can have, which is why it is now required that they be included each year with a company’s full set of accounts. Without seeing its balance sheet, it would be very hard indeed to tell how a business is performing at any given point in time.
So, if you are planning to sink your money into a particular venture, have a good long look at its balance sheet first, and make a completely informed decision.
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Overtrading – The New Business Nightmare
When most of us start out in business we hope to do well of course; we expect that all of our hard work will be rewarded with success. We dream of manifold orders for multiple units, and nothing could be further from our minds than the idea that our rapid success could prove fatal to our budding business, and yet ‘overtrading’ can and does cause just such major problems for many new businesses.
The difficulties that are caused by a new business’ overtrading are a little like a man running down a very steep hill, as he begins, he can see his destination at the bottom quite clearly and so picks up speed until as he gains momentum gravity takes over and he finds himself rolling head over heels without control, not even sure where he will end up. His only certainty that he will not escape undamaged.
When a business starts to pick-up too much speed on its journey something similar happens, as it trips over itself to keep up, often, control is the first casualty. Consider those manifold orders for multiple units for a moment, if your business does not have the infrastructure to service them, which will often be the case at the start of trading, you may find yourself borrowing to buy materials and/or machinery and while money is rapidly going out at that end to service the growth in orders, nothing is yet coming in at the other to pay for your unexpectedly rapid expansion; in this scenario cash flow horrors are imminent.
Supposing you are fortunate enough to find a lender who can help with your immediate cash flow difficulties, the likelihood is that this type of finance will be very costly and at some point having to ‘pay the piper’ will bring a second round of cash flow issues.
It is not only extra materials and equipment that will be needed if the business takes off out of your control; one of the most costly expenses for any business is that of labour; employees cost a fortune and there is only so much that can be done without expanding their numbers; with more bodies will come a need for a larger space, which will pile more costs on top of the already growing list and we are back to the man on the hill once more.
Keeping overtrading in check is actually a very simple affair; all that is needed is the foresight to keep control of everything; a good solid business plan that is updated regularly will allow any business owner a crystal ball to see potential problems way in advance and when your business’ nice steady trot suddenly turns into a canter you can be ready to pull hard on the reins.
Budgets and cash flow projections are also tools that will help you keep things moving at the perfect pace for your business, but just in case things do pick-up faster than anticipated, have a plan at the ready to cope; talking to your bank and securing finance in advance for when it is needed will allow you some slack that should see you through any cash flow bumps.
However, the simplest thing any business owner can do to ward of the demon of overtrading is to keep their greed in check, ambition is healthy, but it pays to be a little bit patient so that your business can grow from strong, solid foundations in to a lasting concern.
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Bank Reconciliation Basics – Avoid Bookkeeping Bungles
Accountants Bournemouth – Business Bookkeeping
Learning the language of business can be tricky when you are new to the business world, throw in the odd accountancy term and it can often seem like an up-hill struggle. When an accountant or bookkeeper speaks of ‘bank reconciliation’ and suggests that you need to ‘reconcile your records’ for the bank or VAT etc., or asks if this is something that you do, all they are actually talking about is comparing your own bookkeeping records against those of, for instance, your bank and checking for any discrepancies. A ‘bank reconciliation report’ is simply a statement explaining any difference between your own business bank book balance and the statement issued by the bank. Often you will need to include receipts in your investigation, but it is nothing more or less than a thorough check carried out to ensure that everything is in accordance.
Having understood what it is that is required is only the first step however, bank reconciliation may be simple in theory, but there are a number of common errors that you’ll need to avoid if possible.
Ensure that you do not overlook any transactions; it is very easy to pay for something or receive payment and neglect to enter it in your cashbook; this is where your receipts and cheque book stubs will prove vital as you can check them against your own records to make sure everything is correct.
It is important that you record all transactions in your cashbook, even the automatic ones, such as DDs and Standing Orders; leaving these out of your main record may cause them to be over looked; it is important to keep your records as complete as possible.
If your calculations are off when you add the transactions together this could cause everything to be skewed, so whether you are using a computer spreadsheet or paper and a calculator, check and double check every total.
When it comes to ‘outstanding cheques’, (those that were written before the end of the month in question, but that may not necessarily have cleared yet and so will not show on your bank statement), it is important to remember to confirm at each reconciliation, which cheques have cleared and which are still outstanding. Taking account of cheques that have bounced or not been cashed will allow your reconciliation statement to be completely accurate at the time of its preparation.
Bank reconciliation is just one of many types of reconciliation that take place in a business’ finances, and it is important to be as thorough and accurate as you can. If you are very new to business, sit down with your accountant and ask him to run through the basics with you; if you have enlisted the help of a professional bookkeeper get them to show you how they reconcile the various parts of your records; even those business owners who leave the more complex elements of bookkeeping to someone else should always do the bank reconciliation themselves, as it will help them keep a finger on the pulse of the business’ finances.
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Business Bookkeeping for Beginners
Accountants Bournemouth – Basic Bookkeeping For Business
Although there are many people who will be happy to take your bookkeeping off of your hands, the professional bookkeeper or accountant to name but two, there is a strong argument for keeping this important part of business in-house and doing it for yourself. It will, no doubt, save you money to do your own books, as bookkeepers, quite rightly expect to earn a decent living from their skills and most accountants will charge a premium for taking on this administrative task, but thrift is not the only reason for doing your own books.
Bookkeeping is nothing more or less than keeping the financial records of your business; knowing what is happening with your venture on a day to day financial level is one of the most important keys to business success and will allow you to stay ahead of the game.
It does not have to be difficult or complicated if you choose to keep your own business’ financial records, providing you remember a few basic rules:
- Records need to be maintained very regularly; one cannot miss a day’s bookkeeping because of a busy schedule; keeping your own books will take a chunk of your time, but it will also allow you a clearer insight into your business’ fiscal health.
- Consider using specialist software to assist your record keeping as most modern packages provide much of the information you will need to keep accurate records. Alternatively a simple spreadsheet will be very effective; keeping your books electronically provides better security and a clearer, more easily accessible set of records, so is always preferable to a paper ledger.
- Keeping everything clean, clear, tidy and presentable will help you to access everything you need more quickly; all invoices, cheque stubs and receipts need to be carefully filed and stored safely for the time when they are needed.
- It is important to cross check all of your records against those of your bank each month; doing this will throw up any inconsistencies or errors before they have a chance to continue unchecked; reviewing what is happening monthly is never a bad idea anyway as it will enable you to notice any potential difficulties well in advance.
Getting a heads-up on any potential problems is one of the best reasons for becoming your own bookkeeper, as well-kept records will enable you to forecast all sorts of pertinent financial things, not least how much tax you are likely to have to pay.
If you have a set of records that give a clear picture of your business’ recent financial history, and present the facts in an accessible way, when the authorities ask to see them, at a tax inspection or investigation, things are more likely to go smoothly for you. Abdicating responsibility by handing everything over to a third party such as an accountant is unfortunately not enough of an excuse to get you out of hot water if there are problems; it is the view of HMRC that business owners should have a handle on their own company’s finances and they have a valid point; far better perhaps to keep everything under your own control so that you can always know what, for better or worse, is going on.
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