You don’t need to be an accountant to understand your finances. Knowing how income, expenses, and profit flow through your accounts helps you make smarter decisions, plan for tax, and stay in control.
Want to see how this works for your business? Book a free consultation and we’ll create a clear financial snapshot together.
1. Your Profit and Loss: What’s coming in and going out
Shows your income and expenses each month:
- Income / sales: Money coming in from clients, e.g., invoices for services or products.
- Expenses: What you spend to run your business, e.g., software subscriptions, office supplies, or subcontractor payments.
The profit left over is what determines your tax liability. Tracking it regularly helps you spot trends, control costs, and plan for tax and growth.
2. Your Balance Sheet: Your business snapshot
Shows what you own (assets), what you owe (liabilities), and your capital (what’s left):
- Assets: Cash, equipment, stock.
- Liabilities: Bills, loans, taxes due.
- Capital / equity: What’s left after assets minus liabilities.
- Drawings: Money you take out for personal use – reduces capital but doesn’t affect profit.
Think of your P&L as a bucket collecting all your income and expenses for the year. At year-end, the profit is poured into your Balance Sheet as retained earnings, like emptying the bucket into a jar. The P&L then starts fresh for the next year. Understanding this shows you your cash position, obligations, and what’s available to reinvest.
Want a system that automatically tracks these numbers so you can see your business health at a glance? Book a free consultation.
3. Why profitability matters
Even if you don’t know every line in your accounts, you need to know:
- Are you making money?
- How much tax do you owe?
- How much can you reinvest or save?
Gross profit vs net profit
- Gross profit = income – direct costs (linked to delivering your product or service, e.g., materials or subcontractors)
- Net profit = gross profit – other business costs (indirect/general expenses, e.g., office rent, software, insurance)
- Note: This is the profit before tax. Knowing your net profit helps you plan for tax, spending, and reinvestment.
Profit margin: A quick check of how much of your total sales becomes profit.
- Example: £1,000 sales, £400 net profit → 40% margin
- Helps you see whether your business is earning enough overall.
Markup (for variable-cost businesses, like builders): The percentage added to direct costs to set a price for each job.
- Example: A project costs £600 in materials and labour, a 50% markup gives a price of £900.
- Markup ensures each job covers costs and contributes to profit, while profit margin shows overall business health.
Understanding these basics allows you to make confident decisions about pricing, spending, and reinvestment – without needing to memorise every line of your accounts.
4. Practical steps
- Track income and expenses regularly – see the story of your business.
- Understand your profitability and where drawings go – know your year-end position.
- Use this info to plan spending, tax, and growth effectively.
Want a simple, clear approach to understanding your finances without the overwhelm? Book a consultation and let’s create a system that works for your business.
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