1. Understanding financial accounts and cash flow Neil Taylor - Director Edwards Chartered Accountants neiltaylor@edwardsaccountants.co.uk

2. Outline of the session  Book-keeping and software  Profit and loss account  Balance sheet  Cashflow statement  Developing and understanding financial projections  Sensitivity of financial information  When and how to work with an accountant  Questions

3. Book-keeping and software  Keep up to date – a little bit often  Manual hand written records  Microsoft Excel  Very flexible and easy to use  Prone to errors  Specialist accounting software – Sage/Quickbooks/TASbooks  More readily turned into annual accounts  Up front training time  Cloud based packages - Xero  Quick to set up  Very graphical  All benefits of cloud based software

4. Profit and loss scenario 1 Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total TURNOVER Sales30,000 50,000 60,000 70,000 630,000 DIRECT COSTS Cost of sales24,000 40,000 48,000 56,000 504,000 GROSS PROFIT6,000 10,000 12,000 14,000 126,000 OVERHEADS Wages and Salaries4,000 48,000 Rent1,000 12,000 Rates350 4,200 Office supplies150 1,800 Telephone and internet200 2,400 Insurance300 3,600 Motor400 4,800 Subscriptions200 2,400 Sundries175 2,100 Depreciation214262831041261451671882082292501,625 OPERATING (LOSS)/ PROFIT(796)(817)(837)3,1423,1213,0995,0805,0585,0377,0176,9966,97543,075 INTEREST EXPENSE Overdraft Interest93142595628143----242 NET (LOSS)/ PROFIT(805)(848)(879)3,0833,0653,0715,0665,0555,0377,0176,9966,97542,833 CUMULATIVE(805)(1,653)(2,532)5513,6166,68711,75316,80821,84528,86235,85842,833

5. Profit and loss account  Measures a company’s financial performance  A summary statement of income and expenses  Covering a specified time period (month, quarter, year)  Management accounts vs statutory financial statements  Main categories – sales, cost of sales, admin expenses  KPIs – gross profit, operating profit  Matching and accruals concepts  Depreciation

6. Balance sheet scenario 1 OpeningJan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16 FIXED ASSETS Fixed assets-1,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,000 Accumulated Depreciation-(21)(63)(125)(208)(312)(438)(583)(750)(938)(1,146)(1,375)(1,625) CURRENT ASSETS Bank1,000-------3,9789,84810,78319,05327,323 Trade Debtors-36,000 60,000 72,000 84,000 CREDITORS DUE < 1 YEAR Bank-3,0094,3705,7428,4665,0521,6101,889----- Trade Creditors-33,330 52,530 62,130 71,730 Other Creditors-4458901,3351,2452,4903,7351,6453,2904,9352,0454,0906,135 NET CURRENT ASSETS1,000(784)(2,590)(4,407)(2,241)(72)2,1256,33610,55814,78321,00827,23333,458 TOTAL NET ASSETS1,000195(653)(1,532)1,5514,6167,68712,75317,80822,84529,86236,85843,833 CAPITAL & RESERVES Capital1,000 Retained Earnings-(805)(1,653)(2,532)5513,6166,68711,75316,80821,84528,86235,85842,833 1,000195(653)(1,532)1,5514,6167,68712,75317,80822,84529,86236,85843,833

7. Balance sheet  Measures a company’s financial position at a point in time  A summary statement of assets and liabilities showing net worth and liquidity  Management accounts vs statutory financial statements  Cost basis vs valuation  Main categories – fixed assets, current assets, liabilities, capital and reserves  KPIs – debtor, creditor and stock days, liquidity ratios

8. Cash flow scenario 1 Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total RECEIPTS Sales-36,000 60,000 72,000 84,000 672,000 PAYMENTS Invoiced Costs-32,130 51,330 60,930 70,530 574,230 Wages and Salaries4,000 48,000 Overdraft Interest93142595628143----242 Fixed assets-1,200 13,200 VAT---1,335--3,735--4,935--10,005 NET CASH FLOW(4,009)(1,361)(1,372)(2,724)3,4143,442(279)5,8675,8709358,270 26,323 OPENING BANK1,000(3,009)(4,370)(5,742)(8,466)(5,052)(1,610)(1,889)3,9789,84810,78319,0531,000 CLOSING BANK(3,009)(4,370)(5,742)(8,466)(5,052)(1,610)(1,889)3,9789,84810,78319,05327,323

9. Cashflow statement  Cash is king  A summary statement of cashflows for a specified period  Shows how changes in the balance sheet and P&L account affect cash  Management version (future) vs statutory version (historic)  Main categories – movements in working capital, interest and debt servicing, capital expenditures and receipts, other  KPIs – interest cover, working capital cash generation

10. Developing financial projections  Who for?  Looking forward – minimum 3 years  Profit & Loss, Balance Sheet.  Build from the ground up  Most importantly – Cash Flow  Understanding your business, and where is it heading  What else does an investor look for ?  Assumptions

11. Understanding & using the projections  How much money is required? Based on what?  Minimum sales & margin  What if….. ? Key sensitivities in the projections.  Half the revenue / double the cost  KPI’s relevant to your business – reach their minimum?  Projections must be robust  Under promise & over deliver

12. Sensitivity of financial information  Flex the main KPIs in your financials to see how sensitive your business is to changes in the following:  Sales  Gross profit percentage  Length of time your customers take to pay you (debtor days)  Length of time you take to pay your suppliers (creditor days)

13. Profit & loss - 10% fall in sales Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total TURNOVER Sales27,000 45,000 54,000 63,000 567,000 DIRECT COSTS Cost of sales21,600 36,000 43,200 50,400 453,600 GROSS PROFIT5,400 9,000 10,800 12,600 113,400 OVERHEADS Wages and Salaries4,000 48,000 Rent1,000 12,000 Rates350 4,200 Office supplies150 1,800 Telephone and internet200 2,400 Insurance300 3,600 Motor400 4,800 Subscriptions200 2,400 Sundries175 2,100 Depreciation214262831041261451671882082292501,625 OPERATING (LOSS)/ PROFIT(1,396)(1,417)(1,437)2,1422,1212,0993,8803,8583,8375,6175,5965,57530,475 INTEREST EXPENSE Overdraft Interest9345173765853385---397 NET (LOSS)/ PROFIT(1,405)(1,451)(1,488)2,0692,0452,0413,8273,8203,8325,6175,5965,57530,078 CUMULATIVE(1,405)(2,856)(4,344)(2,275)(230)1,8115,6389,45813,29018,90724,50330,078

14. Balance sheet - 10% fall in sales Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total FIXED ASSETS Fixed assets-1,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,000 Accumulated Depreciation-(21)(63)(125)(208)(312)(438)(583)(750)(938)(1,146)(1,375)(1,625) CURRENT ASSETS Bank1,000--------2,0132,2288,81815,408 Trade Debtors-32,400 54,000 64,800 75,600 CREDITORS DUE < 1 YEAR Bank-3,0095,0937,19410,2928,0985,8866,8042,412---- Trade Creditors-30,450 47,730 56,370 65,010 Other Creditors-3256509751,0452,0903,1351,4052,8104,2151,7653,5305,295 NET CURRENT ASSETS1,000(1,384)(3,793)(6,219)(5,067)(3,918)(2,751)2213,2086,22811,05315,87820,703 TOTAL NET ASSETS1,000(405)(1,856)(3,344)(1,275)7702,8116,63810,45814,29019,90725,50331,078 CAPITAL & RESERVES Capital1,000 Retained Earnings-(1,405)(2,856)(4,344)(2,275)(230)1,8115,6389,45813,29018,90724,50330,078 1,000(405)(1,856)(3,344)(1,275)7702,8116,63810,45814,29019,90725,50331,078

15. Cash flow - 10% fall in sales Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total RECEIPTS Sales-32,400 54,000 64,800 75,600 604,800 PAYMENTS Invoiced Costs-29,250 46,530 55,170 63,810 520,470 Wages and Salaries4,000 48,000 Overdraft Interest9345173765853385---397 Fixed assets-1,200 13,200 VAT---975--3,135--4,215--8,325 NET CASH FLOW(4,009)(2,084)(2,101)(3,098)2,1942,212(918)4,3924,4252156,590 14,408 OPENING BANK1,000(3,009)(5,093)(7,194)(10,292)(8,098)(5,886)(6,804)(2,412)2,0132,2288,8181,000 CLOSING BANK(3,009)(5,093)(7,194)(10,292)(8,098)(5,886)(6,804)(2,412)2,0132,2288,81815,408

16. Profit & loss - Increase in debtor days 30 > 60 Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total TURNOVER Sales30,000 50,000 60,000 70,000 630,000 DIRECT COSTS Cost of sales24,000 40,000 48,000 56,000 504,000 GROSS PROFIT6,000 10,000 12,000 14,000 126,000 OVERHEADS Wages and Salaries4,000 48,000 Rent1,000 12,000 Rates350 4,200 Office supplies150 1,800 Telephone and internet200 2,400 Insurance300 3,600 Motor400 4,800 Subscriptions200 2,400 Sundries175 2,100 Depreciation214262831041261451671882082292501,625 OPERATING (LOSS)/ PROFIT(796)(817)(837)3,1423,1213,0995,0805,0585,0377,0176,9966,97543,075 INTEREST EXPENSE Overdraft Interest3631201261601861811911921831881811,774 NET (LOSS)/ PROFIT(799)(880)(957)3,0162,9612,9134,8994,8674,8456,8346,8086,79441,301 CUMULATIVE(799)(1,679)(2,636)3803,3416,25411,15316,02020,86527,69934,50741,301

17. Balance sheet - Increase in debtor days 30 > 60 OpeningJan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16 FIXED ASSETS Fixed assets-1,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,000 Accumulated Depreciation-(21)(63)(125)(208)(312)(438)(583)(750)(938)(1,146)(1,375)(1,625) CURRENT ASSETS Bank1,000------------ Trade Debtors-36,00072,000 96,000120,000120,0000132,000144,000 156,000168,000 CREDITORS DUE < 1 YEAR Bank-3,00340,39641,84644,63765,32762,04362,48968,81063,13262,38066,29858,209 Trade Creditors-33,330 52,530 62,13061,13062,13071,730 Other Creditors-4458901,3351,2452,4903,7351,6453,2904,9352,0454,0906,135 NET CURRENT ASSETS1,000(778)(2,616)(4,511)(2,412)(347)1,6925,7369,77013,80319,84525,88231,926 TOTAL NET ASSETS1,000201(679)(1,636)1,3804,3417,25412,15317,02021,86528,69935,50742,301 CAPITAL & RESERVES Capital1,000 Retained Earnings-(799)(1,679)(2,636)3803,3416,25411,15316,02020,86527,69934,50741,301 1,000201(679)(1,636)1,3804,3417,25412,15317,02021,86528,69935,50742,301

18. Cash flow - Increase in debtor days 30 > 60 Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Nov-16Dec-16Total RECEIPTS Sales--36,000 60,000 72,000 84,000588,000 PAYMENTS Invoiced Costs-32,130 51,330 60,930 70,530 574,230 Wages and Salaries4,000 48,000 Overdraft Interest3631201261601861811911921831881811,774 Fixed assets-1,200 13,200 VAT---1,335--3,735--4,935--10,005 NET CASH FLOW(4,003)(37,393)(1,450)(2,791)(20,690)3,284(446)(6,321)5,678752(3,918)8,089(59,209) OPENING BANK1,000(3,003)(40,396)(41,846)(44,637)(65,327)(62,043)(62,489)(68,810)(63,132)(62,380)(66,298)1,000 CLOSING BANK(3,003)(40,396)(41,846)(44,637)(65,327)(62,043)(62,489)(68,810)(63,132)(62,380)(66,298)(58,209)

19. When and how to work with an accountant  Why you need an accountant  Finding a good accountant  ICAEW registered firms  Recommendation  Industry specific expertise  Services an accountant can provide  Preparation of annual accounts  Assistance with tax submissions (corporate and personal)  Specialist tax planning (R&D tax credits, patent box)  Regular support through management accounts, book-keeping, payroll