Starting A New Business – Understanding The Financials
8th July 2020
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Paul Adams from Branston Adams shares what you need to know about understanding the financials when starting a new business.

 

Much has changed over the past months but although we are looking forward to an eventual return to “normal” life, some of you may not want to return to your previous work lifestyle. Many of us dream of starting our own business, usually with the intention of providing a better future for ourselves and our families so could now be the right time to do so? Well, although drive, determination and enthusiasm are essential requirements you also need a healthy dose of financial reality!

 

Start Up Costs

Many a budding entrepreneur uses their life savings / redundancy package or borrows on the family home and starts spending money on their new business before calculating the financials, only to discover they did not have enough money in the first place or even worse, that the venture is unviable.

Do not start spending any money until you have undertaken a thorough financial evaluation of your business idea. It is especially important to be realistic about startup costs and remember, although once you have a trading record suppliers will negotiate credit terms, initially you will probably need to pay up front.

 

What do I need to know about financial statements?

When you start trading you need to know which financial statements are important. Even if you need help preparing them you must have a basic understanding of what these statements tell you. They can be compared with prior periods to determine if there is a trend that requires attention.

  • Cash Flow Statement - shows the cash position for a specific time period.
  • Profit and Loss Statement - shows the profit or loss for a specific time period.
  • Balance Sheet - shows a financial snapshot of your business at a specific time point.

 

Why is it important to do a monthly cash flow analysis?

Managing cash flow is fundamental to the success of your business. Your business’ cash-flow cycle can be substantially different from the forecast projections. Even a projected profit can result in negative cash flow for the same period.

Analysis of monthly cash flow can indicate whether your business will collect sufficient cash to settle operating expenses as they fall due. It will highlight specific months when the business may experience cash shortfalls requiring additional finance or cash reserves, and also indicate when you may be able to make debt reductions, major purchases or expand operations.

Cash flow projection is an important management tool and must be developed with realistic expectations. Sufficient cash is critical for a business to pay its expenses and enable expansion.

If your monthly cash flow projections indicate on-going cash shortages, you should review the type of products/services you offer, mix of sales, pricing, terms of the sale and your short-term borrowing needs.

If you need help starting your business and understanding financial statements, please give me a call. I have lots of experience helping people set up successful businesses and can translate financial language into and can translate financial language into plain English!

 

Paul

Branston Adams, Accountants and Business Advisors, based in central Farnham offer FREE initial consultations, specialist Tax Advice, Company Formations, Auditing along with all the normal accountancy services you would expect.

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James F

Member since: 28th November 2019

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