There are 3 fundamental statements that accountants should be producing for you:

1. Balance Sheet

2. Profit and Loss  

3. Statement of Cashflow (you need to have this and many do not!)

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Balance Sheet

The first financial statement is the Balance Sheet which can really be a valuable piece of information to give you a snapshot of where your business is at that time, however many business owners do not know how to read it.

A Balance Sheet is combined of 3 parts:

1. The Assets of the business (Total Assets)  This is made up of Cash, Accounts Receivable (people who owe you money), Inventory (stock), and Property, Plant & Equipment.

2. What the business owes (Total Liabilities) This is made up of Accounts Payable (people you owe money to), Taxes Payable (how much tax you owe) and Debt Payable (any bank loans etc)

3. What the business owns (Shareholder Equity) This is the equity of the business which is made up of the Share Capital (amount of shares in the company) and Earnings (which is from the profit and loss).

The Total Assets will equal the Total Liabilities plus Shareholder Equity of the business.

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Profit & Loss

This will basically show the sales of the business minus the costs which equals the profit (earnings) of the company.

The profit and loss will typically show a period of time (usually a year) and will present everything that has happened, this is different to the Balance Sheet as that shows a snapshot of the business at the date it was made. For example, Total Liabilities will show what liabilities the company has remaining at the date it was made.

The profit and loss is not a factual document as there are accounting entries that can influence the outcome of your profit and loss. One of the most common entries is depreciation. When you buy an asset, depreciation is a reduction in the value of the asset released to the profit and loss account over a period of time. Depreciation appears as an expense in the profit and loss so will reduce your profit overall (however as the tax rules are different from accounting rules, depreciation is added back to your profit in the tax computation).

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Statement of Cashflow

One document which you may have not heard of before is the Statement of Cashflow which is completely factual. It is such a powerful and useful document, it can change your life and really give you peace of mind.

It shows the cash that has come into your business and the cash that has gone out.

It shows 3 different types of cashflow through the business:

1. Operating Cash  

2. Investing Cash  

3. Financing Cash  

For a Statement of Cashflow, we start with the opening cash for that period of time and for each section we show the +/- on the cash position which brings us to the closing cash position.

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The Operating Cash is calculated from any cash received from its products or services and any spending on the business’s day-to-day activities.

Operating Cash Activities include:

• Cash received from the sale of goods or services

• Salary and subcontractor costs

• Payments to suppliers

• Tax Payments

If the operating cash is negative on a consistent basis, at some point, your business is going to run into trouble. It is very common for VAT registered businesses to have two months positive cash position and the third month will be a negative position due to an outgoing VAT payment.

The Operating Cashflow is a great indicator to see how your business is performing, checking every month to see if you have a positive cashflow will mean your business is bringing in more cash than there is going out.

The Financing Cash is cash generated or spent on financing activities and shows the net cashflow involved in funding the company’s work.

Financing Cash Activities include:

• Loans

• Dividends Payments

• Stock Repurchases

The Investing Cash is cashflow generated from investing activities. Investing Activities include:

• Purchase of physical assets

•  Investment in shares

• The sale of securities or assets

The Statement of Cashflow bridges the gap between the Profit & Loss and the Balance Sheet by showing how much cash is generated or spent on operating, investment and financing activities.

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We understand that financial statements can be confusing and not straightforward. At Saint, we sit down with our clients to run through the accounts together so they know exactly where they are plus on top of this we provide free quarterly meetings with our Business Development Manager to run through your quarterly reports so you know how your business is performing, areas where you have done well and how we can improve your business together going into the next quarter.

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We want to provide you with the best resources possible for your construction business in order to succeed. If you want to change accountants, it is a very straight forward process and we can handle the whole thing for you! To get started with a finance team behind your construction firm today book a call in here, or call 020 8187 4201.

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