I was at the cricket on Tuesday. It was England versus the West Indies over in Manchester and, at one point, I looked up at the scoreboard, and one of the great business quotes came to mind.
The billionaire investor Warren Buffet said: “If you can’t read the scoreboard, you don’t know the score. And if you don’t know the score, you can’t tell the winners from the losers.”
And that’s so true. The cricket scoreboard is complicated and, if you don’t understand it, you have no idea what’s going on in the game. And that is so true in business.
There are numbers you need to be tracking – a scoreboard you need to follow to know whether your business is doing well or whether it’s doing badly.
If you think of another example, you wouldn’t expect a pilot to look at the cockpit of a plane with all of the instruments and flashing lights, and not know what they all mean. How would they keep safe and get to the destination?
So, in your business, what is the scoreboard? What should you be tracking?
There are a lot of numbers you can track, and I did a separate blog/video on some of the marketing numbers. Today, though, I’m just going to focus on the three most important financial statements.
You don’t have to be an accountant to understand them – every business owner should have a grasp of what they mean. The three main ones are:
- Profit and Loss Account
- Balance Sheet
- Cashflow Statement
So, let’s take a quick look at what they mean.
Profit and Loss Account
At the face of it, it’s quite simple – the P&L Account shows your sales for the period less the expenses for the period. This gives you your profit.
You should be looking at this at least monthly. So, if you look at it for the month of September, your sales in September less anything you’ve spent in September will give you a profit.
And for your company to last in the long term, it needs to be making a profit on a consistent basis. You might have a bad month and make a loss every now and again…..but you can’t do it over and over.
The next of the financial statements is the Balance Sheet. This is very much a snapshot of your business at any given time.
If we pick a date, let’s say the 30th of September, it would add up all of the assets within your business and take away all the liabilities.
The assets include the things and the stuff that you own. That can include:
- fixed assets – plant and machinery, furniture, vans or cars that the company owns
- stock – if you buy and sell things it would be the items you bought but haven’t yet sold
- debtors, ie people who owe you money
- any cash in the bank.
The liabilities are the things you owe, for example:
- trade creditors – suppliers who you’ve bought stuff from but haven’t paid yet
- loans you may have, or an overdraft
- tax bills – VAT, PAYE or corporation tax.
The Balance Sheet adds up all your assets and takes away all the liabilities. This comes to a figure that, to an extent, is what your business is worth on any given date in pure cash terms.
As you can imagine, your business should really at all times have a positive figure, ie the assets should be larger than the liabilities.
Again, you should track this every month. It can happen that you do have negative assets every now and then but, if that’s a long-term picture, there’s a real problem with your business.
The Cashflow does exactly what it says on the tin. It shows you your movements of cash.
So, again, if you’re looking at it for September, it would have your opening cash balance on 1 September.
It would then show the cash coming in from operations, ie the day to day running of the business – your sales and purchases. It would include any cash coming in or out from investments, eg in fixed assets, and any movements in financing, eg loans.
When you add those up and take some away, you’ll get your closing cash. If this figure is positive every month, you have a healthy business. Negative and you may be in trouble.
The Cashflow statement can actually be the most important of those three statements because the P&L and the Balance Sheet have a bit of accounting theory in them and can be manipulated. However, the Cashflow is fact. You cannot change or apply theory to opening cash balance and your closing cash balance.
For a business to have long-term viability, it must make a profit, but it also must be generating positive cash on a regular basis. A business can be profitable but make no cash and then go bust because there’s no cash to pay the creditors.
Those three statements are the scoreboard you should be tracking to see whether you’re winning.
They’re all relatively straightforward, but, if in doubt, please do ask your accountant. They can look at them in detail and explain them to you. They can also spot trends and will know what’s good or bad, or what warning signs you should be looking at.
At the very least, you should be doing this once a year but preferably more often through management accounts or regular meetings, so you’re on track of that score all year long. Every month you know where you stand and you know whether your business is winning or losing.
And, by the way, England won the game easily.
Please get in touch
If you need any advice from your favourite Liverpool accountants, please give us a ring on 0151 380 8080 or email firstname.lastname@example.org