This shows you how much profit your business is making for every pound of sales. You can work out your business’s gross profit margin by dividing the gross profit by turnover, and the net profit margin by dividing its net profit by its turnover. Here is an example of a typical P&L account for a small limited company: A business’s total income, less all its day-to-day running costs, is its net profit.
Turnover less direct costs gives a figure called gross profit. Your business’s income from sales is called turnover. If your business sells services, it may not have any direct costs. The day-to-day running costs divide up into direct costs, which are costs that relate immediately to sales, and overheads, which are general running costs.įor example, the cost of buying materials to make goods to sell, and the cost of delivering finished goods to customers, would be direct costs. This is often called the P&L for short, and it shows your business’s income, less its day-to-day running costs, over a given period of time – often a year, month, or quarter. For example, if it were destroyed in a fire or flood, or went off, or went out of fashion – your business would still have enough money easily available to pay its imminent debts. This will show you whether, if your business’s stock couldn’t be sold. If your business sells goods, try working this ratio out but starting with the current assets excluding stock. If this figure is less than 1, alarm bells should start ringing. This is not good news, because it means your business doesn’t have enough money available to pay all its debts.Īs well as this quick check, you can also use your balance sheet to calculate some useful ratios.įor example, if you divide the current assets figure by the current liabilities, you’ll see if your business has enough money on hand to meet all its immediate obligations. If your business owes more than it owns, the balance sheet total will be negative. If your business owns more than it owes, then the balance sheet total will be a positive figure. Here is an example of a typical balance sheet for a small limited company: These two totals are called the balance sheet total. The total of the bottom half of the balance sheet will equal the top half.
That’s why the bottom half of the balance sheet is headed up something like “Owners’ Equity”, “Owners’ Capital”, or “Shareholders’ Funds”. If the business were to sell all its assets off and pay all its debts, anything left over would be available for the business’s owner(s) to draw out. There will then be a total of all the business’s assets less its liabilities. Long-term liabilities are those which are due in more than a year, like a mortgage or a bank loan. The balance sheet then shows the business’s liabilities, which divide into current liabilities, money due within a year like tax bills and money owed to staff. These are divided into fixed assets, like large items of equipment such as computers and furniture, and current assets.Ĭurrent assets are more easily and quickly converted into cold hard cash, like money owed by customers and money in the bank. The top half of the balance sheet starts with the business’s assets. That might be today, or it might be at the end of your business’s accounting year. The balance sheet gives you a snapshot of how much your business owns (its assets) and how much it owes (its liabilities) as at a given point in time. What do these terms mean, and what information can these documents provide you about your company?Įmily Coltman FCA, Chief Accountant to FreeAgent – who provide the UK’s market-leading online accounting system specifically designed for small businesses and freelancers – explains. You may have heard your accountant or bank manager talk about your “balance sheet” and “profit and loss account”.
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