Accounting 101


I wrote sometime ago about ways you could make your accounting easier. See my post at “paperwork-blues

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Many people struggle with the whole accounting thing, and I can see their eyes glaze over at the mention of it, but at its essence it is no more than a version of that child’s toy that I call Posting Bricks where you have to put the correctly coloured brick into its matching hole. While getting someone else to do your accounts for you can ease the work load, it’s useful to have even a basic understanding of what the figures are trying to tell you.

Accounting is a process of taking financial transactions (a fee you receive or an expense you incur) for a period (usually one year) and sorting them into bundles with other similar items. So, you take all the blue bricks and put them together, and then all the red bricks and put them together and so on with the green and orange and all the other ones.

Then you total each bundle (or count the bricks). You put all the income bricks together, and you put all the expense bricks together, and you take one total from the other. The difference is your profit or your loss for the period. A document summarising these transactions is called an INCOME & EXPENDITURE ACCOUNT or A PROFIT AND LOSS ACCOUNT.

And really, the rest is finessing.

The common income bricks for a private practice would be fees received from clients, and any other business related income. The common expense bricks would include supervision, insurance, rent, CPD, any business related motor expenses or phone expenses, stationery etc

A BUDGET is your best guess of what is going to happen for the coming year, or what you plan will happen over the coming year. It has the same headings as the bundles I described above, except that instead of actual historical information about what you received and paid out, it uses estimates of what will be received and paid out.

Redheaded Baby Playing With Blocks
Redheaded Baby Playing With Blocks

A CASH FLOW STATEMENT is a type of budget that sets out what you think will be the cash flowing in and out of the practice over the period. It is usually broken down by month. The purpose is to see in which months there will be excess cash, and in which there won’t be enough. Plotting your projected cash flow over the year ahead will help you to plan. If you know there’ll be a surplus in some months, that may be a good time to plan for occasional expenses, such as holiday costs or a new car. Or it may be a good time to put some money aside for the leaner months.

You can find an example of what a budget or a cash flow might look like by clicking the links below.

Cash flow

Budget (Note: an income and expenditure account looks almost identical to this, and the headings will be exactly the same. However, the figures will be factual figures relating to the past rather than estimated ones for the future.)

If the numbers for your practice make your eyes glaze over, and you’d like to know how to use them more effectively, maybe I can help. Contact me here for an appointment or a free 20 minute consultation, or browse my services.

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