Understanding your financial statements
The three statements every agency founder should be able to read.
Every business owner should understand their financial statements. You don't need to become an accountant, but you should know what each statement is for, what to look at and what the warning signs are.
You wouldn't drive with your eyes closed, so why run your agency without looking at its financial performance? There are three main statements, and they're all connected. If you'd like more detail, ask your accountant to walk you through each one until you're comfortable. If they can't or won't, it may be time for a new accountant.
Profit and loss
The first, and sometimes only, statement most agencies look at. It shows your sales, the costs of delivering them, your overheads (such as rent) and your profit. Each month you want the actual figures, ideally tracked against a budget, with commentary explaining what happened and why.
Balance sheet
Shows what you own and what you owe. Assets typically include cash, trade debtors (clients who owe you money) and fixed assets such as computer equipment. Liabilities include bank loans, trade creditors (suppliers you owe) and HMRC for VAT and National Insurance. In a healthy agency, assets exceed liabilities and there's at least three months of working capital in cash.
Cash flow
Arguably the most important statement, and the least used. Running out of cash is the biggest reason agencies fail, and worrying about paying salaries and the taxman is the biggest source of stress for owners.
"Sales is vanity, profit is sanity, cash is reality."
It can be anywhere from seven days to three months or more between issuing an invoice and getting paid, and you still have to pay salaries, rent and HMRC in the meantime. A cash flow statement starts with your opening cash, adds and subtracts the money moving through day-to-day operations, asset purchases and loan repayments, and arrives at your closing cash for the month.