f you run your own business you’ll be familiar with annual accounts. As an accountant, I’m good at preparing these documents, but all that skill is of no real interest to the business owner. Business owners don’t generally prepare accounts – they read them. Or at least, they are supposed to. The fact is, reading accounts is also a skill. Some business owners are good at it and some aren’t.
I was privileged to work with a retired businessman some years ago who turned out not to be retired at all – he had sold off his business and immediately started a new one. He was the most energetic person I have ever met and he could glance at a set of accounts and draw conclusions at lightning speed. This is one end of the scale. On the other hand, I have clients who pick up their accounts and put them down again and own up to not having the foggiest idea what they mean. This doesn’t mean they are not good at business – it just means accounts are not their field of expertise, but it does help as a business owner if you can pick out the basics.
Three tips for reading accounts
- In the Profit and Loss Account
Also known to many as the P&L this page shows you how the business has done in the year. First look at the bottom line – it should be called something like “Net Profit” or “Net Profit after tax”. If this is a negative figure you may be in trouble – the business has made a loss. I say “may” because it can be normal to make a loss in the first few years of trading, for example.
- In the Balance Sheet
Again, have a look at the bottom line. This represents the total worth of your business. It will be called different things depending on whether you are a sole trader or have a limited company, but this figure represents the accumulated value of the business over all its years of trading.
- Last year’s Figures
One of the things that adds to the sheer volume of numbers that you need to look at is the inclusion of last year’s figures for comparison purposes, so do just that: compare last year’s net profit with this year’s. Have things improved? Do the same for the balance sheet.
There’s a fourth basic I would look for but it won’t be in the accounts if you are a sole trader (or in a partnership), and that’s tax. How much tax are you going to have to find, and when will you need to pay it? Your accountant should be happy to discuss your accounts with you, but don’t leave them in a vacuum – ask questions and get them to explain the bits you don’t understand.
How do you feel about reading your accounts? Are you baffled? Do you look for something different to my suggestions? Please comment below and let me know.
Grace Heathfield (MAAT, AATQB)