A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support 6.4 Financial reports A poorly run business can topple from ‘just getting by’ to insolvency in as little as three months. If you are not producing monthly financial reports, you may not see this coming. And if you are not producing monthly financial reports there’s a fair chance that you have a poorly run business. Want you need The approach: Boards need financial information which: • is useful (it contains things they need to know) • they can read and digest quickly • they can learn to understand • they can question. The essential monthly Financial Report: For most businesses most of the time there is only a need to provide directors with two pieces of paper containing: • the simplified balance sheet at the end of each month showing what your activity is worth − details of actual transactions for the past month and the year to date, and − previous forecast information for the same periods for comparison. Tables 6.1 and 6.2 are example layouts for these reporting documents. The precise details they contain are a matter for individual businesses to decide for themselves on the basis of their monitoring experience. The simplified balance sheet: • Why? The balance sheet is extremely easy to prepare (if you keep good financial records) and wonderfully informative. In its simplest form any director can quickly learn to understand it. • an income and expenditure account combined with a budget report which brings together 154
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support • What does it do? The balance sheet is a snapshot of how much money you would have on any particular day (usually the last day of the month) if you could pile up the cash from all your bank accounts and cash boxes, if your customers paid everything they owe you, if you sold all the trading stock you are holding, and if you then paid off all your debts to your suppliers, any outstanding VAT and Inland Revenue payments, and any bank loans. It is a precise snapshot of what the trading part of the business is worth. • What does it say? The sum you end up with is your net current assets. It is not a real amount of money, so don’t get too excited by it. But it can be a valuable indicator of how your enterprise is performing month to month. If the figure is minus rather than plus there had better be a good reason – such as a loan for investment in the business. Otherwise you could be in serious trouble. • What does it not say? Just ignore items which you can’t easily or realistically turn into cash – such as equipment and buildings. They will distort the picture, and could be difficult to assess. It won’t correspond to the balance sheet in your annual accounts, and this is why it’s called ‘simplified’. The monthly income and expenditure account report: • What it is: The income and expenditure account at its simplest tells you what money has come in and what has gone out (itemised under standard headings, including separate sales figures if you have more than one trading activity) in the course of the past month. • What it says: This will help to show whether your bank balance has gone up and down, but not much more. • What it does: The two accounts provide an opportunity for scrutiny of the way the business is spending its money and discussions about how it is earning it. That’s entirely legitimate. Unfortunately, there is a terrible tendency for the expenditure account to provoke distracting debates which have little to do with business performance. Managers do well to head off these discussions as soon as possible if they are not relevant. • What it does not do: The income and expenditure account is an expected aspect of the finance report, and many reports will insist on it. But, depending on the type of activity, other information such as budget comparisons, can be more useful. 155
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A guide to third sector trading - WCVA

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