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A Guide to Finance for Non-financial Managers

Source | LinkedIn : By Peter Jordan 

Hi everyone. Today I found a great article in the  that I know many of you will enjoy reading or possibly relate to. The original article can be found here if you’d like to read the article there, or I’ve pasted parts of it here to share it. It’s well worth a read.

Learning how to survey and manage your financial position is perhaps the most important part of running a successful business.

Whatever your background, you will need to know how to collect figures and use them to establish your performance, your problems, and your opportunities for growth.

This guide will help you to manage your profits and losses plus your cashflow and profitability, by carefully preparing balance sheets and realistic budgets.

How do I manage my profits and losses?

You need to compose a profit and loss statement.

This records all the sales, expenses, costs, profits and losses for the previous ‘accounting period’ (commonly one year) , as well as any tax provisions.

It gives you a picture of your trading performance, and allows you to identify any growth or problem areas.

Take the following steps and record as follows:

  1. Turnover, not including VAT.
  2. Direct costs. These are costs that rise in line with volume of sales (e.g. raw materials, etc).
  3. Gross profit. I.e. turnover minus direct costs/cost of sales.
  4. Indirect costs. I.e. Overheads – rent, salaries, depreciation of fixed assets, etc.
  5. Operating profit. Or PBIT – your profit prior to tax and interest, including any income or costs not related to your operations (e.g. money made when selling off an asset, etc). If you have a long term contract, decide how much from it to include in that years contract.
  6. Net interest payable. E.g. interest payable on bank loans, etc.
  7. Profit before tax. Take away interest charges from PBIT to reach this figure.
  8. Tax payable.
  9. Net profit.

Remember, regardless of whether they are invoices or not, record sales and purchases. Similarly, record prepayments and accruals in the relevant period. For example, any rent paid in advance, or payable interest, should be added later. Finally, spread out the costs of fixed assets. Instead of charging the full cost upon purchase, add a ‘depreciation’ charge in every period over the asset’s lifetime. You will need to work out yourself the likely rate of depreciation.

What is a balance sheet?

A balance sheet is a summary of your assets and liabilities – the value of what you own, and the price of what you owe.

Creating one gives you an idea of what position your business is in at the end of an accounting period.

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