It is vital that you understand finances when running your own business.
You need to keep an eye on how much money your business is making so that you can fix any problems.
Keeping track of your finances will also allow you to identify if you need to access external finance to close cash flow gaps or fund business growth.
There are three key statements that are used to monitor and predict a business’ financial health:
- a profit and loss account
- a cash flow statement
- a balance sheet.
With the information outlined in these documents, you can spot any issues and act accordingly.
You will also likely need the statements when pitching to investors for equity investment or applying for a business loan.
Profit and loss account
If your start-up is bringing in more cash than it’s costing to run then you're in a great position.
Understanding your profit and loss account will indicate how successfully your business is operating.
Profit is the amount of money left from all the income your business generates once costs and expenses have been accounted for.
Loss is when the costs and expenses of operating your business are more than the amount of revenue that it generates.
A profit and loss account is a calculation of your business’s profit and loss over a period of time, such as monthly, quarterly, or annually.
Limited companies are required to include a profit and loss account when they submit their annual accounts to Companies House.
Read more about profit and loss accounts.
Cash flow statement
A cash flow statement shows the money coming in and the money going out of your business during a specific time.
It is an important document designed to help you understand how well your business is managing its cash and if you have enough money to pay your costs.
You can use the information in the statement to set budgets and tackle any issues with cash flow.
The statement tracks the flow of cash, such as:
-
Operational cash flow
Day-to-day cash generated from sales and the money you spend running the business.
-
Investments cash flow
Money you spend and receive from investment activities such as buying and selling equipment.
-
Financing cash flow
Money provided by or paid back to investors, lenders, shareholders, and business owners.
Balance sheet
A balance sheet outlines the following at a specific point in time:
- Assets – things that a business owns. This includes current assets (used for a business’s day-to-day operations and to pay its expenses) and non-current assets (assets a business intends to use and own for a period that is longer than one year).
- Liabilities – money a business owes to other people, companies, or organisations. Liabilities are either current and due to be paid within a year or long-term, which are debts due to be paid within a period of more than 12 months.
- Equity – what the business is worth once liabilities have been subtracted from assets.
This includes cash a business owner and other shareholders initially invested into the business when it launched, as well as additional income and losses that have been generated.
It's called a balance sheet because the assets of a business should be equal to the liabilities and shareholders' equity.
Assets = liabilities + shareholder’s equity
Limited companies are required to include a balance sheet when they submit annual accounts to Companies House.
Read this guide for more advice on balance sheets, and download a balance sheet template here.
Credit scores
Your business’ credit score is another aspect of business finance you’ll need to understand.
Also known as a credit rating, a credit score indicates how creditworthy your business is, according to its credit history.
The higher your credit score, the more likely you are to be approved for business finance.
Before applying for funding, first check your credit score with the UK’s three credit reference agencies - Experian, TransUnion, and Equifax.
Business credit scores are usually for limited companies.
If you are a sole trader, lenders will likely use your personal credit score when considering a funding application.
When you first start a business you won’t have a trading history which can make sourcing business finance difficult.
Fortunately, you may still be able to get a Start Up Loan which involves a personal credit check.
Read our guide to business loans and credit scores.
Download the guide
Want a PDF of our guide? Click the download button below:
Your previously read articles
Chapter six: Access to finance
Discover the various means you can finance your business, from debt to equity.
Next chapterBritish Business Bank plc is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at british-business-bank.co.uk.
Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
Sign up for our newsletter
Just add your details to receive updates and news from Start Up Loans
Sign up to our newsletter