Business Finance - Simply Put!

Introduction

In the Marstan Guide "Introduction to Business Management", we said that good financial systems are vital to the smooth running, or even the survival, of an organisation.

Business Finance can appear to be complex and difficult to understand. However, a knowledge of some of the basic principles can make everything clear.

The importance of good financial information cannot be underestimated. If you organise financial information correctly and ensure that you keep everything up to date, it is not a daunting task.

There are a number of very good reasons why you should provide and use financial information for your business.

1. Some financial information is compulsory. (For example for the authorities regulating Companies or the Tax Authorities).
2. Without financial information you cannot keep track of where you are; particularly whether you are making a profit, which is one of the main purposes of your business and not as easy to spot as it first appears.
3. Financial information is there to help you think more intelligently about your business, to make decisions and take actions which make you more efficient and more profitable.
4. There can be no peace of mind unless financial information is accurate and up to date. Perversely, this is even the case when the business is going through a bad patch. Knowing the problem is half way to solving it.

What financial information do I need?

You need the answers to these questions:

• How much money do I have in the bank?
• How much money do I owe other people?
• How much money do other people owe me?
• Am I making a profit?
• Do I have the right amount of capital in the business?
• Is my business efficient?

The answers to these questions are provided by the following key pieces of information:

1. Profit and Loss Account
2. Balance Sheets
3. Cash Flow Forecast
4. Budgets

These documents each have their function but sit together comfortably to provide a very clear picture of your financial position and guidance on what actions you should take to enhance your business.

There is a mass of terminology around each of these subjects; gross profit, net profit, PBIT, depreciation and many others.

Where can I get more information?

We have produced a series of Marstan Guides to demystify the 4 main types of business information and to explain the terms.

Each of these Guides will take you back to basics and explain in very clear and simple language what each of the terms mean.

When you have been through these guides you will never be confused by accounts again.

Follow these links:

• “Profit and Loss Accounts – Simply Put!” – This Marstan Guide explains what a profit and loss account is, what you need to know about turnover, the difference between gross profit and net profit, the definition of work in progress and the impact of depreciation.
• “Balance Sheets – Simply Put!” – This Marstan Guide explains what a balance sheet is, shows the difference between fixed assets and current assets, explains the different ways of treating short term and long term creditors and describes the different ways of financing the business through capital.
• “Cash Flow – Simply Put!” – This Marstan Guide explains why cash flow is so important, the difference between profit and cash, how to prepare a cash flow statement and a cash flow forecast and 9 ways to improve cash flow.
• “Budgets – Simply Put!” – This Marstan Guide (*** to be competed)