Ask the experts

Do you have a burning question that you would like the answer to? Or maybe you’re looking for some advice to help your business? In each edition some questions will be shared and answered by some of The Business Bulletin experts.

Q. What is a balance sheet? How is it beneficial to me and how do I use it?

A. A balance sheet, also known as a statement of financial position, is a financial statement that gives a snapshot of the financial balances of an organisation at a specific point in time. The purpose of a balance sheet is to give interested parties that could be potential lenders as well as directors and shareholders information on the company’s financial position. A balance sheet contains what the company owns in the way of physical assets, the bank balances, what liabilities it has as well as what money is owed to it

Liabilities are split into two categories:

■ Current liabilities - these are defined as the short-term financial obligations that are due within one year or within a normal operating cycle.

■ Non-current liabilities - these are defined as liabilities that are not expected to be settled within one year or a normal operating cycle for example loans.

Similarly, assets are divided into two categories:

■ Current assets - those that can easily be realised or converted into cash within a year included here would be bank balances (if in the black of course, otherwise these would appear as a current liability) and money owed to the business from its sales activity.

■ Non-current assets - defined as long term investments are those that are not expected to be converted into cash in the current period, examples of this would include property, vehicles and other plant and machinery.

Wendy Tate Bean Counters

Q. What is a profit and loss statement? And how do I use it effectively for my business?

A. A well-structured and accurate P&L will allow a business owner to 1. Calculate the potential corporation tax it will have to pay when due and allow them to plan accordingly to take steps to reduce this liability or put money aside to pay for it.

2. Identify which parts of the business are profitable and which are not, thus allowing a business owner to allocate resources more effectively. This will greatly assist in planning for the future growth of the business.

3. Identify a break-even point for the business to allow them to price their goods and services more accurately and in line with the market.

James Blacklaws JB Commercial Finance

Contributing experts

James Tarry Scottsdale Moneywise

James Blacklaws JB Commercial Finance

Wendy Tate Bean Counters

Margot Clarke Margot Clarke

Q. What should be included in a set of management accounts?

A. Management accounts help businesses to manage their finances and their operations effectively and make informed decisions leading to effective business growth. Like the statutory year end accounts, they include the Profit & Loss and the Balance Sheet. However the difference is that whilst the statutory accounts look back in time, management accounts look forwards into the future.

They’re typically prepared on a monthly/quarterly basis and include other reports such as budgets, forecasts and cashflow statements plus any key performance indicators that are pertinent to your business and sector. By comparing them month on month you can see if your business is growing in line with your expectations and react to any issues as and when they occur.

For some businesses it’s even appropriate to identify income and expenses according to the month in which they occur. For example, if you send a client an invoice in July for a job carried out in June you’d use management accounting to pull that invoice out of the July figures and show it in the June figures. This gives a true picture of the activity during that particular month and allows you to compare it with the same month in the previous year(s). It’s vital for any business, serious about growth, to be looking at the management accounts on a monthly basis.

Margot Clarke Margot Clarke

Q. What business insurances should I have in place? What is essential and what is recommended?

A. It’s essential (and a legal requirement) for a business to have a comprehensive business insurance package depending on their individual requirements. these usually include buildings cover, contents cover, and Public Liabilities insurance.

It is also likely that business interruption insurance would be seen as an essential addition to any policy. I would always recommend a business owner covers themselves plus any essential employees/directors for critical illness cover, life insurance, and a form of income protection depending on their value to the business.

James Blacklaws JB Commercial Finance

A. Leaving aside the necessary general insurances (public liability, insurance of business assets etc) a good starting point is what protection have you given up in your move to self-employment? Larger employers offer sick pay schemes and death-in-service benefits, these can be obtained for less than you may think, especially ‘relevant life’ cover which is a business expense when paid via a limited company.

The pandemic should help a focus on health covers, not just sick pay (income protection) but also the less common private medical insurance, critical or serious illness cover. The loss of key employees can be covered by key person protection, and shareholder protection (which makes funds available to buy out a shareholder) should not be ignored.

James Tarry Scottsdale Moneywise

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