Understanding the numbers

In business the numbers really do count. All business owners must be aware of the importance of cashflow, revenue, profit and loss; this is especially important when it comes to impressing potential investors or lenders.

In brief

• Cashflow
• Understanding balance sheets
• Your profit and loss account
• Forecasting revenue - the importance and pitfalls
• A Return on Investment
• Assets and liabilities
• Why these numbers matter
• What to do next

Cashflow is the oil that keeps a business engine running smoothly, and the availability of cash in a company is necessary to meet payments to suppliers, staff and other creditors.

Cashflow refers both to how much money actually comes in, and when it comes in, and to cash going out, and when it goes out.

These figures are vital to potential investors and one of the first things they will want to know.

A cashflow statement shows the movement through, and availability of, cash to the business over a given period. It's important to be on top of cashflow from the outset, stipulating clear terms with customers about their responsibilities to you.

It's dangerous to rely too heavily on predicted cashflow levels and far better to save up funds before making commitments or investments.

Read the Cashflow guide

A balance sheet is one of the main measurements used to register the performance and health of your company.

It is a snapshot of who owns what, of the productive assets the business owns, such as cash or stock, and debts of the business.

Basically speaking, where the money came from and where it is now; capital plus liabilities equals assets.

The term “double entry” is one you hear 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.

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

Your profit and loss account (or P&L account) is a trading account spanning a certain period, usually a year, but it can also be monthly and cumulative. It typically shows sales revenues; cost of sales/cost of goods sold; a gross profit margin; fixed overheads and/or operating expenses; and a profit-before-tax figure. In short, it shows how well your business has performed during that period.

There are two types of profit: gross and net. Gross profit usually means the difference between sales and the costs of the product or service. Net profit strictly means after all deductions, such as fixed costs or fixed overheads, have been deducted. Net profit also refers to the figure before deduction of corporation tax, or “net profit before tax”.

Revenue, or sales revenue, is the total amount of money or other assets received from sales of the company's products, usually measured over the course of a year.

It's a number any potential investor will want to see, although forecasting revenues is fraught with difficulties because you cannot actually know how many sales you will make over the course of a year.

To come up with a forecast, it is important to take as many factors into account as possible, such as the total market for the type of goods or service and what sort of share the competition has. A common error is over-optimism in forecasting.

A Return on Investment or ROI is an important financial and business performance measure.

The ROI is the gain from investment minus the cost of the investment.

The resulting figure is usually expressed as a percentage or ratio. It refers to the profit made from an investment.

It can also refer to the value of the business as a whole or to a specific product, factory or service. It seeks to define the profit made from a business investment or business decision.

Bear in mind that costs and profits can be ongoing and may have accumulated for several years, which must be taken into account when arriving at the correct figures.

It's better to err on the side of caution when predicting an ROI.

There are two types of asset: fixed and current. Fixed assets are long-term possessions, such as computers, a factory or machinery. These also include intangible assets such as trademarks and brand names. Current assets are short-term assets whose value can fluctuate from day to day and can include stock, money owed by customers, cash-in-hand, money in the bank, and short-term investments.

Liabilities are what the business owes. They are usually either loans of the type used to finance the business and short-term debts, or money owing as a result of trading activities to date. They include money owed to suppliers, short-term loans, overdrafts or other finance and taxes due within the year (such as VAT, PAYE and National Insurance).

Not all entrepreneurs or business owners can work proficiently with numbers. Some are creative people, others are focused on the hard manual labour involved with their company, while certain owners have a particular strength in sales or online technology. Whatever the business does or is, without a basic understanding of the important numbers, your business is under threat. If you're not skilled with numbers, it is sensible to find someone who is and who can help you.

Your local business banking advisers will be able to give basic guidance about financial planning, as should Business Link advisors . 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.