You’ve checked your business bank account. There’s money in there, so everything must be going well… or does it?
For many small business owners, the bank balance is the first place they look to see how their business is doing. It’s understandable — it’s a figure you can see, it changes regularly, and it tells you how much cash is available at that moment.
But your bank balance doesn’t tell the whole story.
Understanding the difference between cash in the bank, business profit and money you need to set aside for tax and VAT can help you make more informed decisions and avoid unexpected financial pressure.
1. Your bank balance: what’s available today?
Your bank balance shows how much money is sitting in your business account at a particular point in time.
However, some of that money may already have a purpose.
You might have supplier invoices waiting to be paid, wages due, a VAT payment approaching or other business expenses coming up. You may also have received money from customers for work that still needs to be completed.
That means the balance you see isn’t necessarily the amount you can comfortably spend.
A healthy bank balance is useful, but it doesn’t automatically mean your business is financially healthy.
2. Your profit: what is your business actually earning?
Profit is different from cash in the bank.
In simple terms, your profit is the difference between your business income and its allowable expenses over a period, taking account of the relevant accounting rules.
For example, imagine your business has the following figures for a month:
- Sales income: £5,000
- Business expenses: £3,000
- Profit before tax: £2,000
At first glance, that looks straightforward. But your bank balance may tell a different story.
Perhaps some customers haven’t paid their invoices yet, or you’ve paid for equipment that affects your cash flow differently from the way its cost is recognised in your accounts.
Your profit and your available cash can therefore be quite different.
Knowing your figures helps you understand not just how much money has come in, but how your business is actually performing.
3. Tax and VAT: money you need to plan for
Another common mistake is treating all the money in a business bank account as available to spend.
If you are VAT registered, some of the money received from customers may represent VAT that you will need to account for to HMRC, after taking account of eligible VAT you can reclaim.
You may also need to set money aside towards your tax liabilities.
The amounts and timing will depend on your circumstances, your business structure and the taxes that apply to you.
Planning ahead can help you avoid the unpleasant surprise of a tax bill arriving when the money has already been spent elsewhere.
4. How regular bookkeeping helps you see the bigger picture
Good bookkeeping is about more than recording transactions and keeping paperwork organised.
When your records are accurate and up to date, you have a clearer picture of your income, expenses, outstanding payments and financial commitments.
Monthly financial reporting can take this a step further by helping you understand what your figures are telling you.
It can help you identify changes in expenses, monitor profitability, review cash flow and make more informed business decisions.
Instead of waiting until the end of the year to discover how your business has performed, you can review its position throughout the year and act when it matters.
Is your business giving you the financial clarity you need?
At Mays Accounting Services, I help small businesses keep their bookkeeping organised and understand their numbers through regular financial reporting.
My aim is to help you feel more informed about your business finances, so you can spend less time wondering where the money has gone and more time making decisions with confidence.
If you would like support with your bookkeeping or want to understand how monthly financial reporting could benefit your business, I’d be happy to have a conversation.
Get in touch with Mays Accounting Services for a free introductory consultation.
Visit www.maysaccountingservices.co.uk to find out more.
Good financial decisions start with knowing your numbers.