Getting your teeth into Accounts

Accounting and Finance in general can be a little offputting for some people.  In truth through it doesn't take much knowledge to get an idea of what is going on.  Accountants normally prepare accounts each year for companies and these get filed with the UK Government at Companies House.

What are Financial Statements.

The Finance statements of a company comprise its :- Directors Report, Balance Sheet, Profit and Loss Account and cash flow statement.  Each of these are useful in understanding how a company is performing.

Directors Report - This can be useful to understand any particular event in the period in question, usually unusual things like acquisitions or large investments are highlighted in this written section.

Balance Sheet - this shows the assets and Liabilities of a company at a given point in time, comparing the current year to the previous one is helpful as if assets have gone down, then either the company has made a loss or more has been taken out of the business in the form of dividends and taxation than was generated out of profits.  The size of the balance sheet will give you a general idea about the scale of a business.

Profit and Loss - Only larger companies are required to file one of these, if it is present then that means the business is likely to be larger.  Check if sales have risen or fallen compared to the prior year.  Has the business made a profit? or a Loss?  What is the size of the profit and size of the loss as a % of turnover.  If a loss is very large it may be hard for a business in that situation to turn around.

Cash Flow Statement - this shows how cash has been generated and used within the business, so how much did the trading activities generate, how much came from other income.  What cash was used for, for example the purchase of fixed assets.  Then how much cash came from new loans or other financial agreements such as HP, and how much was repaid in the form of loan or HP repayments.  This is a key Financial statement and if included can give you some really good insights into the health of a business.

Notes to the accounts - these contain interesting details such as the amount of Trade Creditors / Other Creditors and Trade Debtors.

To get a good understanding you need to consider all of the above.  If you need help you can always contact us and ask for guidance.

Bio - Adrian is the CEO of Reporting Accounts, he is a regular contributor to this blog and Medium.com