Ep08 - How to Read Your Business Accounts and What They Really Mean

Your year-end accounts shouldn’t just be a box-ticking exercise. In this episode, Nicola walks you through what your accounts are really telling you about your business — and how to use them to make smarter decisions.

You’ll learn what each key report means, from the profit and loss to the balance sheet, and how to spot trends that reveal your business’s true financial health. Nicola also explains the difference between cash and profit, why your accountant’s adjustments matter, and how to read your figures with confidence.

If you’ve ever looked at your accounts and felt unsure what they actually mean, this episode will help you turn them into a powerful tool for clarity and control.

What You’ll Learn:

• The key sections of your year-end accounts and what they show you.
• The difference between cash flow, profit, and retained earnings.
• How to use your accounts to make better strategic decisions.

Resources & Links:

I’ve written a book that expands on the topics in this podcast and comes with a companion guide. Learn more at www.thenumbersquarter.co.uk/book.

About the Podcast:

The Balanced Business – The Director’s Handbook is a 12‑part podcast series hosted by Bedford‑based Chartered Accountant Nicola Hageman. Designed for UK small business owners and company directors, the podcast explains how to run a Limited company with more clarity, confidence, and control. Each episode covers a practical topic – from choosing your business structure and staying compliant with HMRC to budgeting, VAT, systems, and delegating. The series is based on Nicola’s book and companion guide, available at www.thenumbersquarter.co.uk/book.

About Nicola and The Numbers Quarter:

Nicola Hageman is the founder of The Numbers Quarter, a friendly and approachable accountancy practice based in Bedford. She specialises in helping owner‑managed businesses grow their profits, plan for the future, and reduce stress. Nicola is known for her plain‑speaking advice and passion for aligning personal and business goals.

Connect with Nicola:

• Instagram – www.instagram.com/nicola_hageman
• LinkedIn – www.linkedin.com/in/nicolahageman
• Website – www.thenumbersquarter.co.uk

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Transcript

0:14

Hello and welcome back to the Balanced Business Podcast. I'm Nicola Haman from The Numbers Quarter, and this is episode eight of the Director's Handbook, the part of the podcast where we walk through the essentials of running a limited company in a way that's clear, practical, and totally doable. Today we are talking about something that tends to either make people glaze over or feel quietly, ashamed. They should understand it, but they don't. We are talking about your accounts, your profit and loss, your balance sheet, and all those reports that your accountant might send over once a year. Now, I want to be really clear from the start. You do not need to become an accountant to understand your numbers. That's my job. But if you are running a business, it's incredibly powerful to have a basic understanding of what your accounts are telling you and how to use that information to make better business decisions. This episode isn't about turning you into a finance whiz. It's about giving you enough confidence to look at your accounts and say, oh, I actually get this. So let's get into it. So why should you care about your accounts? Before we get into the different reports, let's just pause and ask, why does this even matter? Well, your accounts are the financial story of your business. They tell you whether you are making a profit, where your money is going, whether you can afford to hire someone, invest in new ideas, or take a bit more money out yourself. And if you only look at your numbers once a year or worse, not at all, then you are basically flying blind. Think of it like driving a car without ever looking at the dashboard. You might be going fast, but if you don't know how much fuel you've got, how hot the engine is, or whether the oil light is flashing, it's fairly risky, right? Your accounts are, your business dashboard and learning to read them is a skill worth having. Let's start with the profit and loss report, also called the p and l or the income statement. This one's probably the most familiar. It shows what your business has earned, what it's spent, and what's left over as profit. Think of it as the story of your business over a period of time, usually a month, a quarter, or a year is broken down into income. Or revenue. This is all the money that your business has bought in from sales or services before any expenses are taken off. You've then got your cost of sales or your direct costs. These are the costs directly related to delivering what you sell. So for example, if you're a product business, it might be stock or materials. If you're a service business, it might be freelance subcontractors or software tools used just for one client income minus cost of sales, gives you gross profit, which tells you how profitable your service or products are before your overheads. So overheads or operating expenses, these are your general running costs. Think rent, insurance subscriptions, admin salaries, and so on. These are things that you pay for regardless of how many sales you make. Take those off your gross profit and you are left with your net profit, also known as your bottom line. This is what's left after all your business expenses are paid and it's the bit that your corporation tax just about is based on the p and l is great for showing you how profitable your business is, but, and this is a really important, it doesn't show you how much cash you have. Because profit and cash are not the same. And this is one of the most common confusions that I see, and it is totally understandable. People look at their profit and think, great, I made 20 grand this quarter. But then they look at their bank and wonder why it's only got 3000 pounds in it. And that's because profit and cash are not the same. So here's why. You might have made sales but not yet been paid. You might have paid for stock or services upfront, but not sold them yet. You might have taken money out as a dividend or repaid a loan. The p and l only shows invoiced income and recorded expenses, not what's actually landed in your bank. And this is where your cash flow statement comes in. And we're gonna cover that in a future episode. But for now, just know profit is important, but it's not the full picture. So your balance sheet, let's move on to that. I'll be honest, this is the one that feels a bit more abstract at first, but once you understand the structure, it really does make sense. So the balance sheet shows a snapshot of your business as at a specific point in time. So unlike the p and l, which looks at a time period, the balance sheet says, here's where we stand today. And it's made up of three sections. You've got assets, liabilities, and equity. So assets, these are things that the business owns or is owed. So that includes cash in the bank, any outstanding invoices for any money that you are owed from clients, any equipment, stock, or anything valuable that the business owns. Your liabilities. This is what the business owes to other people. So think unpaid bills, tax liabilities, loans or finance. And then equity. This is what's left over after you subtract all of your liabilities from your assets, and it represents the value of the company. This includes things like retained profit and share capital. Now, the balance sheet has to balance, hence the name, so assets equals liabilities plus equity. So if you've got 50,000 pounds in assets, you owe 20,000 pounds, then your business is worth 30,000 pounds on paper. It's a high level view of your financial position. So now let's take a quick look at current assets. This is one part of the balance sheet that I personally really love to look at and I think it's something worth paying attention to, even if you're not interested in the rest of it. Current assets are basically the things that your business could turn into cash pretty quickly, so we are talking cash in the bank, unpaid invoices, and any stock or short term investments. And then on the other side, you've got current liabilities, and this is what the business needs to pay out soon. Things like VATO to HMRC, unpaid supplier bills or credit cards, or short-term loans. I really like this comparison because it really gives you a simple, practical check. If I had to pay all my bills tomorrow, could I do it? It's a very quick snapshot of whether you're in a healthy position or starting to feel a squeeze. And for me, it's one of the most. Useful parts of the balance sheet. You don't need to dive deep, you just need to compare the numbers and ask yourself if things feel comfortable. It's a really good habit to get into. So what to watch out for in your accounts. You don't need to get into every line item, but there are a few things that are helpful to keep an eye on. Are your profits consistent? If your profit is jumping up and down wildly from month to month, it might mean that something's not quite stable. Your pricing, your expenses, or even your billing cycles, are you getting paid on time? Look at your debtors figure. That's how much people owe you. If it's creeping up, it might be time to tighten up your payment terms or follow up more regularly. Do you have any upcoming liabilities, things like VAT, corporation tax or loan repayments. These might not hit your p and L until later, but they will show up on your balance sheet. And is your cash position healthy? Even if profit looks good, if your tight on cash, your feel it. Use your accounts alongside your bank balance to get the full picture. So what does good look like? Now this will vary from business to business, but generally you are aiming for steady or growing profit, a healthy level of cash compared to your expenses, debtors and creditors that don't get out of control. An ability to invest in the business where it's needed without panicking, and honestly a business where you understand what's going on and aren't just hoping that all is fine. Now the best thing about understanding your accounts is actually being able to make better, quicker decisions. Things like, can I afford to hire someone? Is now the time to invest in a new system? Do I need to put up my prices? Should I take more money out or build up a buffer? These decisions feel way less scary when you can back them up with numbers. You don't need to look at reports every day, but reviewing your accounts monthly or even quarterly, puts you back in the driver's seat. And what to ask your accountant. So if your accountant sends you reports and you have no idea what you're looking at, just ask.. I love going through accounts with clients, really helping them to understand what the numbers mean. Now, here are a few great questions that you can start with. Can you walk me through my p and l? What should I focus on? Is my profit in line with my sales? Are there any costs that I should be reviewing? What's my break even point? And how much tax should I be putting aside each month? You deserve clarity and a good accountant will be more than happy to help you understand the story behind your numbers. And my final thoughts here is the big message that I want to leave you with, your accounts aren't there to make you feel stupid or overwhelmed. They're there to help you run a better business. You don't have to love spreadsheets. You don't need to understand double entry bookkeeping, But knowing the basics of your p and l and your balance sheet, that's empowering. It gives you control, it gives you confidence, and it stops you relying on guesswork. So next time you get your set of accounts from your accountant, instead of filing them away or ignoring them, take a few minutes, ask a question, spot trend, and use the information. You'll be amazed at how much clearer everything feels when you start using your numbers as a tool, not just a tax formality. Thank you for listening to this episode of The Balanced Business Podcast. I hope it's helped you feel just a little bit more comfortable with your accounts and maybe a little curious. In the next episode, we are going to explore planning ahead, budgeting, forecasting, and setting financial goals that actually help you build the life that you want, not just the business that you think you should. I'm Nicola Haman from the Numbers Quarter, and I'll see you in episode nine.