As a small business owner, you have probably found yourself confused by all the different statements, reports, and processes that you need to compile in order to run your business.
Some of these are essential to both running your business successfully and remaining compliant with HMRC.
Here we take look at three of the most important financial statements that you need to know about as a business owner…
1. Profit & Loss Statement
A Profit & Loss Statement, also known as a P&L Statement, shows a company’s revenues, expenditure, and profits over a certain period of time – usually a quarter or 12 months.
The P&L Statement is a key document that limited companies must produce to satisfy HMRC requirements.
Profit & Loss Statements are prepared on an accrual basis, this means they are prepared according to what the company has invoiced but not necessarily paid yet.
A P&L statement should include:
- Costs of goods sold
- General expenses
- Other expenses (taxes, interest, etc)
- Net income
2. Cash Flow Statement
The Cash Flow Statement summarises the amount of cash actually going in and out of your business. Unlike the Profit & Loss Statement, a Cash Flow Statement works on the cash basis of accounting, meaning it only counts cash that has physically moved in or out of the company.
A Cash Flow Statement consists of three main parts:
- Cash flow from operations or operating activities – cash received from sales, and cash paid to salaries and suppliers
- Cash flow from investing – capital expenditures, acquisitions, and divestments
- Cash flow from financing – shareholder dividend payments , loans or investments received, and loan principals repaid
You should prepare a Cash Flow Statement at the end of every financial year.
3. Balance Sheet
The Balance Sheet shows a business’ financial standing at a specific point in time as opposed to over a period of time like the P&L Statement. A balance sheet is required when submitting your annual company accounts to HMRC.
You will also need to complete a Balance Sheet if you are applying for a business loan, pitching for investment, or applying for large contracts such as government and council work.
The balance Sheet has three main parts:
- your assets
- your liabilities
- shareholders’ equity
This gives information on what you own (assets) and who owns it (liability / equity). The total value of your assets should always match the total value of your liabilities.
If you need any more information about the essential financial statements for your business, or help putting these together, please get in touch with us here at Magpie Accountancy.