Did You Start a Business to Become an Accountant?

Let’s be honest most business owners don’t dream about balance sheets and cash flow statements!

You started your business because you had a passion, a great idea, or a skill that people need. But at some point, you realised that having a deep understanding of your numbers is crucial for a healthy business.

Keeping on top of your finances isn’t just a legal requirement; it’s the difference between a thriving business and a struggling one.

The good news? You don’t need to become an accountant to understand the basics. In this guide, we’ll break down the key accounting principles in plain English no jargon, no unnecessary complexity. Just the basic knowledge you need to make smart financial decisions.

1. The Three Pillars of Business Finances

Think of your business finances like a three-legged stool. Each leg needs to be stable, or everything collapses. Those three legs are:

• Cash Flow: The Lifeline of Your Business

Cash flow is simply the money moving in and out of your business. You could be making sales left and right, but if cash isn’t coming in fast enough to cover your expenses, your business will struggle.

Key takeaway: Profit shows long-term sustainability, but cash flow keeps the lights on. Track it consistently. Use cash flow forecasting tools to predict future inflows and outflows to help you avoid shortfalls.

• Profit and Loss: Are You Actually Making Money?

Your Profit and Loss Statement (P&L) shows what you’ve earned and what you’ve spent within a set period. This is typically prepared on the accruals basis, meaning income and expenses are recorded when they’re earned or incurred, not necessarily when payments are received or made.

It’s about the period the transactions relate to, not the period the cash comes in.

The basic formula:

Revenue – Expenses = Net Profit (or Loss)

If you’re consistently making a loss, something needs adjusting—either your prices, costs, or strategy.

• Balance Sheet: Your Business’s Financial Snapshot

This is a snapshot of what your business owns (assets), what it owes (liabilities), and what’s left over (equity). It’s a reality check on whether your business is in good financial health.

It follows the fundamental accounting equation: Assets – Liabilities = Equity. It can also be arranged as: Assets = Liabilities + Equity. This equation ensures that your books are always balanced.

2. The 5 Most Important Accounting Terms You Should Know

Now let’s simplify some of the key terms you’ll hear frequently:

1. Revenue – The total money coming into your business from sales before any expenses are deducted.
2. Expenses – The costs of running your business (e.g., rent, wages, software, utilities).
3. Gross Profit – Revenue minus the direct costs of making your product or delivering your service (also known as cost of goods sold or COGS).
4. Net Profit – What’s left after all expenses (including operating costs, taxes, and interest). This is your actual profit – the true bottom line.
5. Accounts Payable & Receivable – Money your business owes to suppliers (payable) and money owed to you by customers (receivable). Managing these is important for a healthy cash flow.

3. Simple Steps to Keep Your Business Finances in Order

You don’t need to be a financial expert to stay on top of your numbers. These simple habits can make a big difference:

• Keep Business & Personal Finances Separate – Always use a dedicated business bank account. This makes bookkeeping easier and avoids confusion at tax time.
• Track Everything – Use accounting software like Xero, NetSuite, and FreeAgent to keep accurate, up-to-date records.
• Invoice Promptly & Chase Payments – Don’t let overdue invoices pile up. Consistent cash flow is the key to financial stability.
• Know Your Tax Deadlines – HMRC won’t accept “I forgot” as an excuse. Keep track of deadlines like VAT, Corporation Tax, PAYE and Self-Assessment deadlines.
• Review Your Numbers Monthly – A quick financial check-up helps you spot issues before they turn into costly problems.

4. Common Accounting Mistakes (and How to Avoid Them)

Even the savviest business owners slip up every now and then. Here are the top mistakes to watch out for:

❌ Mixing Business and Personal Finances – Makes bookkeeping a nightmare and complicates tax returns. Always keep them separate for clear and transparent records. HMRC may disallow business expenses if personal transactions are mixed in, leading to higher tax bills.

❌ Ignoring Cash Flow – A business can be profitable on paper and still run out of money. Monitor income vs. outgoings regularly. Positive cash flow means more money is coming in than going out—essential for covering day-to-day operations. Know the distinction between cash vs. profit, and cash basis vs. accruals basis, inside out.

❌ Forgetting About Taxes – VAT, Corporation Tax, PAYE, or other taxes; HMRC won’t wait! Set money aside regularly and stay ahead of deadlines to avoid penalties. Late tax payments can result in interest charges and fines, even if the tax return itself is filed on time.

❌ Not Keeping Receipts – Digital or paper, store all receipts and backup documentation. HMRC may ask for proof of expenses years after the transaction itself. Businesses are legally required to keep financial records for at least 6 years for tax purposes.

❌ DIY Accounting When You Need an Expert – A good accountant saves time, money, and stress by keeping you compliant and tax-efficient. Accountants can help with tax planning strategies, like claiming allowable expenses and optimising VAT schemes. They also keep up to date with the latest regulatory changes, meaning that you don’t have to, and can stay focused on what you do best.

5. When to Call in an Accountant (Hint: Sooner Than You Think)

At some point, DIY accounting can start costing more than it saves. A good accountant can:

• Save you money by spotting tax efficiencies and helping you claim all allowable expenses and reliefs.
• Free up your time so you can focus on growing your business, not juggling spreadsheets.
• Give you peace of mind that your finances are accurate, compliant, and well-managed.
• Save you time and money if you ever find yourself subject to a HMRC enquiry.
• Draw your attention to industry specific or niche regulatory items which you may not know.

If you find yourself dreading financial admin, missing deadlines, or just feeling out of your depth—it might be time to bring in a pro.

6. Practical Accounting Tips for Business Owners

Here are some real-world examples to bring these concepts to life:

Example 1: Cash Flow Management Emma runs a small online store. She made £10,000 in sales last month but has £8,000 in outstanding invoices. Meanwhile, her supplier bills are due now. Because she tracks cash flow, she knows she needs to chase payments or secure short-term financing. If she was just looking at her P&L, she would think she had enough cash in the bank.

Example 2: Understanding Profit Margins Tom owns a café. He sells a cup of coffee for £3, but after factoring in ingredients, rent, and wages, he only makes 50p per cup. By analysing his figures, he realises a small price increase or cost reduction would make a huge difference.

Example 3: Avoiding Tax Pitfalls Sarah is a freelancer. She didn’t set aside money for her tax bill and got a nasty surprise from HMRC. Now, she saves 20% of every invoice in a separate account, so she’s always prepared for the future.

7. Tools That Make Accounting Easier

You don’t have to do everything manually. These tools can simplify your accounting and save your time:

• Xero – Track income, expenses, and taxes in one place.
• Dext (formerly Receipt Bank) – Snap photos of receipts and automatically extract data to streamline expense tracking.
• GoCardless & Stripe – Automate payments to improve cash flow and reduce late payments.
• Airtable & Notion – Organise financial data in a user-friendly way for easy tracking and reporting, to keep all stakeholders happy.

Final Thoughts: Building a Better Home for Your Business Finances

Understanding your numbers isn’t about becoming an accountant. It’s about taking control, making smarter decisions, and building a financially stable business. And if you need a little help along the way? That’s where RedBrick come in.

For a better home for your business finances, email: hello@redbrickaccounting.comor Contact Us.