Business Finance Guide
A comprehensive guide to cash flow, profitability, forecasting, working capital, funding and financial controls. The objective is to know what the numbers mean before a problem becomes urgent.
Business finance
Business Finance Guide for UK Businesses
A comprehensive guide to cash flow, profitability, forecasting, working capital, funding and financial controls. The objective is to know what the numbers mean before a problem becomes urgent.
Profit is not cash
ADVERTISE HEREPromote your business to Accounting Hire visitors.Ask about advertising opportunities →Profit is an accounting measure. Cash is the money available to pay bills. A profitable business can run out of cash because customers pay slowly, stock is purchased early, tax is due, loans are repaid or capital expenditure consumes cash.
| Measure | What it tells you | What it does not tell you |
|---|---|---|
| Revenue | Sales generated. | Whether those sales have been collected. |
| Gross margin | Economics after direct costs. | Whether overheads are covered. |
| Net profit | Accounting profitability. | Actual cash balance. |
| Cash balance | Immediate liquidity. | Future profitability. |
| Debtors | Cash tied up in customers. | Whether all invoices will be collected. |
Build a 13-week cash forecast
A short rolling forecast can be more useful than an annual budget for immediate cash control. Start with the actual bank balance, add realistic receipts and subtract payroll, suppliers, rent, tax, VAT, debt repayments and planned purchases by week.
Working capital
Working capital is tied up in areas such as unpaid invoices and stock. Improve it by invoicing promptly, setting sensible credit terms, collecting overdue debts, negotiating supplier terms where appropriate and avoiding unnecessary stock.
Pricing and margin
Pricing should consider direct costs, overhead recovery, desired profit, tax, capacity and customer value. A high revenue figure can hide weak margins. Review margin by product, service, customer or project where the data allows.
Break-even
Break-even analysis estimates the sales volume or revenue required to cover fixed and variable costs. It is useful when setting prices, assessing a new hire, launching a product or deciding whether an overhead is affordable.
Funding options
| Option | Potential use | Considerations |
|---|---|---|
| Owner capital | Startup and working capital. | Personal exposure and opportunity cost. |
| Bank loan | Investment or working capital. | Interest, repayments, security and eligibility. |
| Overdraft | Short-term cash fluctuations. | Variable cost and availability. |
| Asset finance | Equipment or vehicles. | Total finance cost and asset ownership. |
| Invoice finance | Release cash from receivables. | Fees, eligibility and customer concentration. |
Financial controls
- Separate approval and payment where practical.
- Reconcile bank accounts.
- Review aged debtors.
- Set spending limits.
- Monitor unusual transactions.
- Keep company and personal money separate.
- Review management reports monthly.
When an accountant adds value
An accountant can do more than prepare historic accounts. Useful services can include forecasting, management accounts, tax planning, budgeting, cash-flow reviews, funding information and scenario modelling. When comparing accountants, ask whether these services are included or charged separately.