Getting your head around your accounts is vital in ensuring your business thrives. You can be the best in your field but with bad cash flow, your business might not survive the tough times. Even with the use of an accountant such as ourselves, it’s always handy to know the accountancy jargon to help you on your way to understanding your cash flow:
When we say these words, we are talking about sales, and every business has them. This is the amount you get paid for providing your services or products.
- Cost of Sales/Direct Costs
These are the costs which are necessary to you providing your services or products e.g. the fabric for a dressmaker. Most contractors will not incur any of these types of costs.
- Gross Profit
This is your revenue less your cost of sales, i.e. the profit you make on a sale. So if it costs you £5 per snow globe but you sell them for £7 each, then your gross profit is £2 for every snow globe you sell.
- Overheads/Operating Costs/Indirect Costs
These are all the other costs you incur in order to run your business. That includes wages, marketing efforts, office rent, phone bills, accountancy fees etc.
- Net Profit
This is your gross profit less your overheads which is the number your taxes will be paid on.
- Retained Profits
Once you have deducted your tax, salary and dividends (this is the most tax efficient way of paying yourself), you will be left with your retained profits which is the number you leave in your business. It is always wise to keep a healthy amount of retained profits in the event of a dry spell or needing new equipment.
These are the basics to understanding your accounts. Should you have any questions or require further assistance, feel free to contact us today. At FW Accounting, we strive to help you.
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