Make Profits Not Losses With Your Financial Statements

As the trading year progresses you may begin to lose track of the assets and liabilities held in your business, but it's essential to know where these lie as they are an accurate reflection of what you own and owe.

It's common sense to know how much profit you have made at the end of 12-month trading periods, but it's also useful to have a good grasp of all the figures that lead to the bottom line. This can be defined as the amount calculated after you have taken your total expenditure from your total income. The figure takes into account many aspects of operations within your company, and if you wish to learn more training courses are available. Even if you employ an accountant to look over your books it can still be useful to understand the different elements that establish your bottom line.

Get to know your profits and losses

Depending on the type of business that you operate, you may be legally obliged to create profit and loss statements for the government. For example, limited companies are required to produce this paperwork for taxation and other purposes, but self-employed sole traders do not have to generate these figures in this way - although they still have to fill in a tax return. However, some one-man operations still choose to put together profit and loss documents so they know exactly where they stand financially.

Plus points of financial records

There are many positives to keeping up-to-date records of your income and expenditure, and how one impacts the other. Perhaps the most important factor is that profit and loss accounts may assist you in securing investment, allowing you to expand operations. This is because lenders usually ask for several years' worth of figures, which can all be neatly summarised in profit and loss documents.

Rather than spending lots of time putting together these kinds of figures at once, it's far easier to have them created every trading period, so they are ready to send to lenders, investors and shareholders, if necessary. Another helpful use of these files is that they make it easier and quicker to fill in VAT forms.

Also, the forms and calculations will establish the correct level of tax that you ought to be paying, as well as giving you lots of information when it comes to filling in claim allowance forms. Once you have an accurate grasp of the figures then you're also able to budget better and work out exactly how much money you can borrow and how quickly you can pay it back.

What to keep

Your income and expenditure is made up of a collection of different elements, which will be detailed on profit and loss accounts. The first important figure that needs to be established is the record of all your sales and takings. This can be further divided into your sales and other kinds of income. In order to accurately record the level of sales within your firm, you should keep records of what is sold.

This could be written in books or computer programmes, while other paperwork - such as invoices, receipts and bank statements that reflects business income - backs up the bottom line. Other income also needs to be accurately recorded and could include interest on accounts, rental income and cash from sold equipment, for example. Once the total income is established, you then need to deduct your expenditure, which may include purchases, costs and business expenses.

As with sales, it's important to make a note of items you buy for your firm, while also keeping some record of purchases, such as receipts and credit card statements. When it comes to establishing costs of this nature, you ought to include the goods you've purchased in order to make the products you sell. Obviously this will differ dramatically depending on the sector you work in, but this category generally includes raw materials, machine hire, the cost of small tools and the labour required for production.

Business expenses are an important part of your accounts in that you can deduct them from your gross profit, which can reduce the amount of tax you pay. There are many types of expenses that you can take from your profit, but it's crucial to have records of them. Without investing in some equipment is unlikely that your company will be able to produce goods to sell.

It's possible to deduct them from profits, but this occurs in a different way to business expenses, in that the costs of capital items/fixed assets is spread over a longer time period. Despite this, it's essential to record what you've bought for your firm, which may include vehicles, fixtures and furnishings, technology and machinery.