Understanding the numbers behind a business is essential for making confident decisions, planning for growth and building long-term success. But are you looking at the right figures?
Running a business involves much more than winning new customers, delivering great service and keeping day-to-day operations moving. Behind every successful business is a clear understanding of its finances.
Whether you're a sole trader, a small business owner or the director of an established limited company, knowing how your business is performing financially can help you identify opportunities, spot potential problems and plan for the future.
At Maxwells Chartered Accountants in Bridgwater, Somerset, the team understands the importance of helping businesses make informed financial decisions. Here are five key financial figures every business owner should understand.
Turnover is the total income a business generates from its sales before expenses are deducted.
It's often one of the first figures business owners look at, and increasing turnover can be a positive sign. However, a growing turnover doesn't necessarily mean a business is becoming more profitable.
For example, a company might secure several large contracts but find that the additional costs of materials, staffing and delivery significantly reduce the money it actually makes.
What should business owners look at?
Is turnover increasing or decreasing compared with previous months?
Are certain products or services generating more revenue than others?
Is the business relying too heavily on a small number of customers?
Is increased turnover translating into increased profit?
Reviewing turnover alongside other financial figures gives a much clearer picture of business performance.
Profit is what remains after the relevant business costs have been deducted from income.
It's possible for a business to have impressive sales figures but still struggle financially if its expenses are too high.
Understanding profit margins can help business owners identify which areas of their operations are performing well and where improvements might be needed.
For example, rising supplier costs, increasing overheads or underpriced services can gradually reduce profitability, even when sales remain strong.
Business owners should regularly review their expenses, pricing and profit margins. Small adjustments to costs or pricing can sometimes make a meaningful difference to the overall financial position.
It's also important to distinguish between gross profit and net profit, as they measure different aspects of financial performance.
Profitability is important, but cash flow is equally essential.
Cash flow refers to the movement of money into and out of a business. A business may be profitable on paper but still experience financial difficulties if customers pay late or substantial bills become due before money arrives.
This can be particularly challenging for businesses that operate on credit terms, experience seasonal fluctuations or have significant upfront costs.
To maintain healthy cash flow, business owners should consider:
Monitoring outstanding invoices: Follow up on overdue payments promptly.
Planning for upcoming expenses: Account for wages, rent, supplier invoices, VAT and tax liabilities.
Forecasting future cash requirements: Anticipate quieter periods and larger payments.
Maintaining a financial buffer: Where possible, build reserves to help manage unexpected costs.
Regular cash flow forecasting can help businesses identify potential shortfalls before they become urgent problems.
Overheads are the ongoing costs involved in operating a business, such as rent, insurance, software subscriptions, utilities and professional fees.
Individually, some of these expenses may seem relatively small. However, when combined, they can have a significant impact on profitability.
Reviewing overheads regularly can help business owners identify unnecessary expenditure and ensure their money is being used effectively.
Consider asking:
Are there subscriptions or services the business no longer needs?
Have supplier prices increased?
Could certain operating costs be reduced without affecting quality?
Are staffing and other resources being used efficiently?
Reducing costs shouldn't automatically mean choosing the cheapest option. The aim is to understand where money is being spent and whether that expenditure delivers genuine value.
Tax is another important part of financial management that shouldn't be left until a deadline approaches.
Depending on the structure and activities of a business, tax obligations may include Income Tax, Corporation Tax, VAT, PAYE and National Insurance.
Failing to plan for upcoming liabilities can put unnecessary pressure on cash flow, particularly if money intended for tax has already been spent elsewhere.
Keeping accurate financial records and reviewing your position throughout the year can help you prepare for payments and avoid unwelcome surprises.
Professional tax advice may also help business owners understand relevant allowances, reliefs and planning opportunities that apply to their circumstances.
Maxwells Chartered Accountants provides taxation services alongside accounting, bookkeeping and wider business support, helping clients manage their financial and tax affairs.
Understanding these five figures is a valuable starting point, but their real benefit comes from reviewing them regularly and using the information to make decisions.
A financial review can help business owners answer important questions:
Is the business on track to meet its financial targets?
Can it afford to recruit additional staff or invest in new equipment?
Are profit margins improving or declining?
Will there be enough cash available to cover upcoming commitments?
Is the business financially prepared for future growth?
Management accounts can be particularly useful because they provide insight into financial performance during the year, rather than relying solely on annual accounts.
With reliable financial information, business owners can make decisions based on evidence rather than assumptions.
Managing business finances can become increasingly complex as a company grows. Having the right support can help business owners understand their numbers, plan ahead and identify opportunities to improve performance.
Maxwells Chartered Accountants is an established independent accountancy firm based in Bridgwater, Somerset. The firm offers a range of services for businesses and individuals, including accounting and bookkeeping, management accounts, business planning, payroll and taxation.
With the right financial information and professional guidance, business owners can gain a clearer understanding of their current position and make more informed decisions about their future.
Your financial figures tell a story about your business. The key is knowing how to interpret them and what action to take next.
By keeping track of turnover, profit, cash flow, overheads and tax liabilities, you can put yourself in a stronger position to manage challenges, identify opportunities and work towards your business goals.
Need help understanding your business finances?
Maxwells Chartered Accountants can help you make sense of the numbers and explore the financial support available to your business.
📍 Visit: 4 King Square, Bridgwater, Somerset, TA6 3YF
📞 Call: 01278 423008
🌐 Website: https://www.maxwellsaccountants.co.uk
Contact the team to discuss your business's accounting, management accounts, tax and financial planning needs.
Please note: This article provides general information and should not be treated as individual financial or tax advice. Business owners should seek advice appropriate to their circumstances.
