In the last 3 articles I’ve walked you through your accounts and helped you see how they relate to the day to day activities of your business and what you’ve created financially. Ultimately you will be creating value in your Company reflecting the net difference between the profit after tax and the amount you have paid to shareholders.
At the foot of your balance sheet you will see the total described as ‘Shareholders Funds’ and this is a combination of the initial shareholder investment and the retained profit.
When the Company was incorporated the shareholders purchased Shares with certain rights attached. Usually founder shares include all rights to distributions of profit, share in the sale of the business and rights to vote at members meetings. The face value of these shares is shown in the Capital section of the Balance Sheet. These are often just £1 each in owner managed businesses and often amount to only £100.
Where greater investment is needed in a company, or a group of people are investing together, the share capital will be higher and can be more complex, reflecting the nature of the relationship between the individual investor and the company. Share capital can be structured in any way most suited to the circumstances of your business.
Beyond this, where investors have purchased shares, they may pay more than the face value and this excess will be shown as Share Premium on the Balance Sheet.
As you built your business you will have invested profit in assets, whether they are property, equipment or customer balances which haven’t yet been paid. These items will have used up cash that you generated. And you will have incurred liabilities; suppliers to pay, tax due and perhaps loans or overdrafts. Where the assets are greater than the liabilities there will be equity in your business, the value you’ve accumulated, in exactly the same way as the equity you accumulate when you purchase a property and the value increases as the mortgage reduces to leave you with greater value over time.
If you have bank balances higher than you need for cash flow purposes you have these funds in hand to pay out to shareholders in the future. If you’ve made more profit than you needed to cover your essential drawings you can choose what you do with those funds. Left in the Company they are sheltered from higher rates of tax since Company Tax is now 19%, if you withdraw from the Company you can improve the lifestyle of your family or invest for your future. Deciding how and when you reap the benefits of your hard work is one of the many rewards of being a business owner.
This is our aim in running businesses, to bring value to our customers that allows us to build a sustainable business, employment and enjoyment whilst reaping those financial rewards which allow us freedom and security.
We're qualified Accountants and business advisors , so if you need advice on any of the subjects covered in this blog then feel free to get in touch, you can call us on: 01273 882200
There are proposals to reduce the VAT registration limit to capture more small businesses and increase tax revenue. 55% of small businesses are below the VAT threshold. Find out how you could be effected.
Time for part 3 of your business story blog series! This time we'll be talking about the result of your profit and loss account - the balance sheet!
This is a series of blogs to help you understand and analyse your business by understanding your accounts better. This week we're talking overheads and what your net profit figure means.
This is the first in our series of blogs designed to help you better understand your business accounts. We’re kicking things off with the profit & loss report!