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Your money matters

Understanding your finances

Money, money, money

Finances can feel like unfamiliar territory when you’re just starting out, so it’s a good idea to  get to grips with the financial health of your business. Being on top of your numbers is important for your business strategy, it’s vital to know if you are making a profit or not. If you understand your finances, you’ll have the confidence to make better, more informed decisions and build a robust, strong and sustainable business. 

Our overview and guide will focus on the financial viability of your business, looking at your cost structure and revenue streams.

We’ll help you get to grips with:

  • What numbers you should know
  • Why they’re important
  • How to understand them and what they tell you

Completed your Business Model Canvas yet?

It’ll show you the feasibility, desirability and viability of elements of your business. If you haven’t done one already, now’s a great time to get it all down. It will highlight different strengths and weaknesses now, and in the future. And as your business constantly evolves, so will your business model.

Check your financial knowledge

To get started, read through and note down answers to the following questions about your business finances. They’ll help you identify what you already know and what elements you need to understand further.

Don’t worry if you don’t have all the answers now, we’ve got lots of support available that will help you.

 

What do you know already?

 

  1. 01

    How much do you charge for your products or services?

    How do you get to that magic number – low value and high volume or vice versa. And what do you need to charge if what you’re charging now isn’t enough?

  2. 02

    What does it cost you to take your products or services to market?

    And do you make enough sales?

  3. 03

    What does it cost you to run the business and pay your weekly/monthly commitments?

    That includes everything from wages and supplier costs to rent and your mobile phone.

  4. 04

    What are your net profit margins?

    You need to know about your profit margins because a percentage up or down can make a significant difference to your finances.

  5. 05

    What’s your breakeven point?

    That’s when your business will be profitable, if it isn’t already.

  6. 06

    How much profit is your business forecast to generate this year?

    You’ll need to plan and forecast your sales for the future, including how much stock you might need next year.

  7. 07

    When and how do you plan to expand your team/products/services/operations?

    This will involve your reserves, resources and how much money you have to allow for growth.

  8. 08

    How much can you afford to pay yourself as a wage?

    Think about right now and into the future, and don’t forget you’ll have personal bills to pay too.

Now ask yourself how confident you feel about the answers you’ve jotted down. What would you need to do to understand these numbers better?

One of the things that will definitely help is getting a handle on your cash flow and profit and loss statements, which we’ll cover in this article.

Further reading

We’ve also got other articles on funding to help you get on top of your finances.

Jargon busting

Essential financial terms every entrepreneur needs to know.

A-D

Assets are any items of value within a business, including product inventory, IT equipment, and any intellectual property (IP) the company owns.

Capital is money a business has in its accounts, assets and investments. This can be negative, known as debt or positive, known as equity.

Cash flow is one of the most important elements to be aware of. In the early stages it keeps your business functioning. It’s the overall movement of funds through your business each month, including income and expenses.

Cost of goods sold are costs associated with getting the product or service to market; e.g. raw materials, manufacturing expenses, labour costs. These costs can also be referred to as cost of sales or direct costs.

Depreciation is when a business's assets decrease in value due to the time that has passed since it was purchased.

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E-R

Expenses or costs are costs a business incurs each month in order to operate, including rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising.

Gross profit is the sum of total revenue minus the cost of goods sold showing you the profit before business expenses are deducted.

Liabilities includes any debt accrued by a business since it started trading including bank loans, credit card debts and money owed to vendors and product manufacturers.

Net profit is the profit that remains after business expenses are deducted from the gross profit. Often referred to as the bottom line.

Revenue is money that comes into the business. Also known as sales, income, or turnover.

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Understanding financial statements

There are three key financial statements that’ll help you to manage and understand your finances within your business, whatever its size. They’re a great place to start getting to grips with your numbers.

Cash flow statement

This helps you to understand how much cash is in the business at any one time. It’ll help you to understand your balance right now and your expected balance over the next 12 months . It’s one of the most important aspects to get right because you need cash to function. The statement simply records cash in and cash out so you can see what cash you have in the business, and to help you to forecast your cash flow needs.

Profit and loss statement

This shows your sales revenue and business costs – so how much your company earned or lost over a period of time, usually a year.

Balance sheet

This shows what your business owes and is owed. It’s snapshot of your accounts at a single point in time, showing your assets, liabilities, and shareholder equity. It gives an idea of the company’s financial position alongside what it owns and owes.

What’s next?

You could also: