Demystifying Accounts for Small Businesses

Demystifying Accounts for Small Businesses.

The must have guide for non-financial business owners and decision makers

Simple explanations, tools, tips and strategies to help your transform your business growth capability

Elaine Herlihy

INTRODUCING THE E-BOOK SERIES: "DEMYSTIFYING ACCOUNTS FOR SMALL BUSINESSES"!

Join Elaine Herlihy, a seasoned chartered accountant, as she takes you on a transformative journey through the intricacies of financial accounts. With

Unlock the secrets of finance and accounts with Elaine's expert guidance, as she breaks down complex concepts into clear, accessible language. From financial

more than a decade of industry experience, Elaine's passion and unwavering dedication lie in empowering non-financial managers to grasp and navigate the complexities of finance.

statements to budgeting and beyond, this series equips non-financial managers everywhere with the essential knowledge and skills needed to confidently tackle financial matters.

Drawing upon her extensive work with

Immerse resource

clients from diverse backgrounds, Elaine possesses a profound understanding of the unique challenges faced by small businesses. Now, she brings her expertise and perspective directly to you through this compelling ebook series.

yourself in this invaluable authored by Elaine Herlihy

herself, and embark on a transformative journey towards financial literacy. Let this ebook series be your trusted companion in demystifying finance and accounts, empowering you to make informed decisions and drive success in your professional endeavors.

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CHAPTER 1: NAVIGATING THE LANDSCAPE OF FINANCE

Let's begin by playing a little word association game. What's the first thing that comes to your mind when you hear the word "finance?" Is it long, boring meetings? Or is it perhaps complicated spreadsheets filled with numbers that look like they're dancing a complex waltz? Maybe it’s the anxiety of dealing with financial jargon that seems as if it was designed specifically to make your head spin? If you thought of any of the above, then congratulations, you're not alone!

But what if I told you that, contrary to these perceptions, finance can be made accessible, relatable, even enjoyable for everyone, including non-finance professionals like you? That's precisely the goal of this chapter, and indeed, this entire ebook series.

Just like riding a bicycle or learning to swim, it might seem daunting at first, but once you get the hang of it, you'll wonder why you were ever afraid and burying your head in the sand in the first place!

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Finance is a lot like a mirror. It reflects the activities of every part of a business, from marketing and sales to operations and human resources. Every decision made, every action taken in an organisation has a financial impact. Understanding finance gives you the ability to 'read' and understand this mirror, providing you with valuable insight into the health and direction of your business.

Let's start with the basics.

For many businesses, the main goal is typically to maximize the wealth of its owners or shareholders. This is achieved by successfully managing resources to increase the company's value. Good financial management is crucial to achieving this objective, and that's where you come in. As a non-financial manager or leader in a business, you play a pivotal role in steering the course of your organisation. You're making important decisions daily, and these decisions have financial implications, whether you're aware of them or not.

Having a grasp of finance won't just help you understand how your decisions impact the company's bottom line, but it will also make you a more effective leader. By understanding the financial implications of your choices, you can make better, more informed decisions that can lead to improved performance and value creation for your organisation.

It starts with understanding the three key financial statements: the balance sheet, the profit and loss (sometimes called the income statement), and the cash flow statement.

These are the trinity of financial management, providing a comprehensive snapshot of a company's financial health at any given point in time. We'll be diving deeper into these in the subsequent chapters But finance isn't just about these financial statements. It's also about understanding key concepts like profitability, liquidity, efficiency, leverage, and investment return.

It's about being able to analyse these concepts, understanding what they're telling you, and then using that understanding to guide your decision-making process.

On this exciting journey, we're going to break down the financial jargon, bust the myths, and simplify the complex concepts. But more than that, we're going to make finance something that you, as a non-financial manager, can use as a powerful tool in your toolkit. We're going to make finance your new secret weapon.

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Let's take a moment to bust some common finance myths

Myth 1: "You need to be a math whiz to understand finance." Not at all! While it's true that finance involves numbers, most of the math is basic arithmetic. So don't worry, there won't be any need for differential calculus here.

Myth 2: "Finance is boring." Well, that depends on how it's presented. Sure, if you're just staring at rows and columns of numbers, it can seem tedious. But think of it this way those numbers are telling a story about your business. And who doesn't love a good story?

Myth 3: "Finance is too complex for nonfinance folks." False. Finance can certainly seem complicated at first, but that's just because it's unfamiliar. With the right approach, it can be understood by anyone, and that's what this ebook series aims to do.

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Myth 4: "Accounting and Finance are the same thing" False. It can be a bit confusing since these two fields often intersect and share several similarities. However, they are distinct disciplines each with its own functions and focus.

Two sides of a coin

Accounting is a discipline that involves recording, interpreting, classifying, analysing, reporting, and summarising financial data. Its main purpose is to track a company's financial transactions to provide an accurate picture of the company's financial health.

Accounting results in the production of financial statements such as the balance sheet, profit and loss report, and statement of cash flows. There are different types of accounting including financial accounting, management accounting, tax accounting, and auditing.

1. Financial Accounting: This form focuses on the reporting of an organisation's financial information, including the preparation of financial statements, to the external users such as investors, regulators, and suppliers.

2. Management Accounting: This form focuses on the measurement, analysis, and reporting of information that can help managers in making decisions to fulfill the goals of an organisation.

3. Tax Accounting: This form helps businesses follow rules set by tax authorities. It includes tax planning and preparation of tax returns. Remember though this is tax avoidance not tax evasion!

4. Auditing: This is the independent examination of a company's records and transactions to ensure accuracy, honesty and conformity with laws, regulations and accounting standards.

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Finance, on the other hand, is a broader concept that describes the management of funds, including activities such as investment, borrowing, lending, budgeting, saving, and forecasting.

Finance focuses more on the planning and direction of financial resources and investments. It involves evaluating the risks and returns of different investment options, planning for short and long-term needs, and making decisions about how to allocate resources.

1. Corporate Finance: This deals with the sources of funding, the capital structure of corporations, and the actions that managers take to increase the value of the firm to the shareholders.

2. Investments: This involves identifying the best investment opportunities, creating a balanced investment portfolio, and managing risk.

3. Financial Markets and Institutions: This involves looking at the global financial environment and understanding how money, interest rates, and commodities are traded.

While accounting mainly focuses on the past and records the company's financial transactions, finance is forward-looking and uses the data from the accounting records to make future financial decisions for a company.

As a manager, understanding both these fields can help you in strategic planning, decision-making, risk management, and overall better management of your business or team.

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Key financial concepts and jargon that every manager should understand

Revenue: This is the total amount of money your company earns from its operations, typically from the sale of goods and services. It's often referred to as the "top line" because it's usually listed first on an income statement. Also known as Sales or Turnover.

Profit: Also known as net income, profit is the amount of money left over after all expenses have been subtracted from revenue. This is often referred to as the "bottom line."

Direct Costs or Cost of Goods: Costs spent to make the product you sell or the service you provide.

Expenses: These are the costs incurred by your company in the process of generating revenues, such as wages, rent, marketing costs, and utilities.

Cash Flow: This refers to the inflow and outflow of cash in your business. Positive cash flow means more cash is coming in than going out, a sign of a healthy business.

Operating Expenditure (OpEx): This is the money that a business spends on a day-today basis for running its operations, like salaries and rent. This is also referred to as "Overheads" or "Indirect Costs"

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Income Statement: Also known as a profit and loss or P&L, this shows how much profit or loss a company has made over a period of time.

Balance Sheet: A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.

Capital Expenditure (CapEx): These are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment.

Budget: A financial plan for a defined period, often one year. It greatly enhances the success of any financial undertaking.

Fixed Assets: These are resources owned by a company that can be converted into cash, provide future benefits, or reduce liabilities. Assets can be both tangible (physical, like buildings and equipment) and intangible (non-physical, like patents and trademarks).

Capital: This is the money invested in a business that allows it to buy what it needs to operate.

It can come from investments, profits, or loans.

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Current Assets: Resources owned by a company that are expected to be used or converted to cash within one year. Such items like stock, cash, money owed from customers

Return on Investment (ROI): This measures the gain or loss generated on an investment relative to the amount of money invested. It is used to evaluate the efficiency of an investment or compare the efficiencies of different investments.

Current liabilities: Obligations that a company needs to pay off within one year. These include things like money owed to suppliers, short term loans, PAYE/VAT due to HMRC

Long term liabilities: Obligations that a company needs to pay off in one years time or more. This could include payments for a loan that are due in 12 months plus.

Equity: Also known as net assets or shareholders' equity. In simple terms, it's the amount that the owners (shareholders) would theoretically get if all assets were sold and all debts paid off.

Liquidity: A measure of the ease with which an asset, or security, can be converted into ready cash without affecting its market price.

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Fundamental concept of accounting Double-entry bookkeeping is a fundamental concept in accounting where every financial transaction impacts at least two accounts - one account gets a debit entry, while another gets a credit entry.

These entries are of equal amounts, maintaining a balance in the accounting equation, which is: Assets = Liabilities + Equity.

It's crucial to note that the debit and credit terms don't carry their usual connotations of positive and negative or good and bad. They're simply accounting terms. Double entry is one of the hardest concepts in accounting to get your head around, as it goes against what makes sense.

The table below helps explain whether you debit or credit each of the 4 account types to increase or decrease it.

Increases

Account Type

Decreases

Debit

Assets

Credit

Credit

Liabilities

Debit

Debit

Expenses

Credit

Credit

Revenue

Debit

Assets and Liabilities are from the Balance Sheet and Revenue and Expenses are from the Profit and Loss Account. We'll go into this in more detail in later chapters.

Assets: When an asset account increases, it's recorded as a debit. When an asset account decreases, it's recorded as a credit.

For example, if a company purchases new equipment with cash, the 'Equipment' account (an asset) would be debited (increased), and the 'Cash' account (also an asset) would be credited (decreased).

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Debits and Credits...

Expenses: Expenses are increased by debits and decreased by credits.

For instance, if a company pays rent for its office, the 'Rent Expense' account would be debited (increased), and the 'Cash' account (an asset) would be credited (decreased).

Liabilities: When a liability account increases, it's recorded as a credit. When a liability account decreases, it's recorded as a debit.

For example, if a company borrows money from a bank, the 'Bank Loan' account (a liability) would be credited (increased), and the 'Cash' account (an asset) would be debited (increased).

Let's break it down in a different way: Imagine you own a business and you purchase a piece of equipment for £5,000. In the world of double-entry bookkeeping, two things happen: 1. Your "Equipment" account (an asset) increases by £5,000. This is a debit because assets increase with debit entries.

2. If you paid in cash, your "Cash" account (another asset) would decrease by £5,000.

This is a credit because assets decrease with credit entries.

So, you can see that there are always at least two entries (double-entry), and the total debits equal the total credits.

This method gives a complete picture of all financial transactions and helps to check the accuracy of accounts. To sum up, in double-entry bookkeeping, every transaction affects at least two accounts, and the total debits must equal total credits. This ensures the accounting equation (Assets = Liabilities + Equity) remains balanced. If it doesn't balance, it indicates there may be an error in the record-keeping.

Here's the table again for you ...

Increases

Account Type

Decreases

Debit

Assets

Credit

Credit

Liabilities

Debit

Debit

Expenses

Credit

Credit

Revenue

Debit

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Summary...

These basic terms and principles form the foundation of finance and accounting. They are key to understanding how money is managed and utilised, be it by individuals or businesses.

Mastering these will not only allow you to understand the world of finance better but also enable you to make informed decisions about managing resources.

Remember, as a non-financial manager, your role in finance is not to become an accountant or financial analyst, but to understand the financial implications of your decisions and to communicate effectively with the financial professionals in your organisation.

This is just the beginning of your financial education. As we delve deeper into the following chapters, we will start exploring each of these aspects in detail, teaching you how to interpret financial information, make projections, and understand the financial impact of your managerial decisions.

Welcome aboard this nautical adventure! The ocean of finance may be as vast and complex as the sea, with currents as unpredictable as the movement of whales, but understanding the basic navigation tools will guide you safely through these waters.

Want to know more?

Call Elaine on 01329 729059 or email elaine@belugafinance.co.uk

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Coming next...

Chapter 2: Understanding Financial Statements

In this chapter, we will explore the three critical financial statements - the balance sheet, the income statement (or Profit and Loss account), and the cash flow statement. So grab your favorite beverage, get comfortable, and let's dive in!

Want to know more?

Call Elaine on 01329 729059 or email elaine@belugafinance.co.uk

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