In this installment of our eBay Elevate webinar series, principal chartered accountant Gouri Kubair explores finance fundamentals and offers key advice to help sellers run a financially viable business.

Finance Fundamentals

This webinar explores the fundamentals of finance that you need to run your business - from basic bookkeeping to the key factors of pricing and margin. With Gouri Kubair’s extensive finance experience, you’ll be equipped with the knowledge needed to keep your finance in check.

Bookkeeping basics:

One of the bookkeeping basics is double entry – similar to Newton’s Third Law, which is that for every action, there is an equal and opposite reaction. With financing, you should always try to balance your debit and credit. If you follow double entry, this should be simple.

Once your double entry has been passed, all the transactions that relate to one particular account will be under one ledger account . For instance, if you’re spending money on advertising and marketing, all transactions will be under the ledger account called advertising and marketing. An account analysis gives you an idea of your income streams and expenses, therefore helping you make informed decisions about your business.

Bank reconciliation:

When doing bank reconciliation, you’ll have already linked your bank account to your accounting software. The software then pulls all your banking transactions – meaning all your incomings and outgoings go into different ledger accounts. You’ll also need to provide evidence of what your expenditures relate to by attaching invoices or bills. Always try to do your bank reconciliations weekly to keep track of what you spent money on.

Further bookkeeping basics:

• Journal entries = A journal entry does not affect your bank account as it’s an expense paid out of your own pocket. To record this in your books, you pass it as a journal entry in your accounts. You’ll debit the expense, the asset or whatever you have spent money on and then credit the director's loan account.

• Trial balance = Trial balance is a list of all your ledger accounts with the balance at the end of the period. When you prepare the trial balance at the end of the year, they’re used to prepare your statutory accounts that need to be submitted to the HMRC Companies House.

Pricing:

When running a business, you want to make a profit to go towards either yourself, your family or to charitable donations, so it’s always important to get your pricing right. There are many factors that affect pricing:

• Product/service cost = The costs that relate to bringing the product or service to a saleable condition.

• Value proposition = Value that a customer or potential buyer would allocate your product.

• Competition = Your product’s unique selling points and what competitors are charging for a similar product.

• Value added tax (VAT) & duty = Make sure your products are VAT registered and if not, you can find this information on the HMRC website.

• Product objectives = Checking your pricing policy and marketing strategy before selling your products.

Margin

The direct costs of the products you’ve sold gives you the gross profit margin you’ve made.

Your gross profit needs to be at a healthy percentage because it’ll help to cover all other costs that are fixed or indirect. Make sure you’re aware of the industry you work in as this will determine your gross profit percentage. You’ll also have a net profit, which is essentially the turnover of all your costs which could include non-fixed, the variable costs or the cost of products sold. All the costs you take off from your turnover or your sales will then show your net profit percentage figure.

Management accounts

A fundamental in finance is creating management accounts and they help you understand how your business is doing on a weekly and monthly basis. With this data, you can analyse the accounts and take informed decisions about the business. Your management accounts keep track of your cash flow by generating weekly receivables and payables. Your weekly receivables mean money that people owe you and your payables are what you’re supposed to pay off.

Year-end accounts

Lastly, you’ll have accounts prepared for Companies House, HMRC or an investor who needs to see your year-end accounts. The main thing that your accountants will do or if you're preparing them yourself is a product stock count. This is a well-known practice to take into account the valuation of your stock and if any of it has deprecated in cost.

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