As a small business owner, entrepreneur, or start-up founder in the UK, understanding the basics of numbers and accounts is crucial to making informed decisions. Financial literacy empowers you to manage expenses effectively, understand income streams, set future goals, and ensure sustained business growth.
Do You Need to Be an Accountant to Run a Business?
No, you don’t need to be an accountant to run a successful business. However, you need to understand the basics of how money flows in and out of your business. This knowledge will empower you to make smarter decisions and achieve long-term growth.
Now that we’ve established why financial literacy matters, let’s dive into answering important questions that every UK business owner should know.
What Really Is Income to a Business?
Is income the same as sales? Is it profit? Or is it what you, as a business owner, take home? To clarify, income in a business context has several levels. It's easier for me to explain using a chart:
Sales/Revenue after VAT
(-) Variable Costs
Contribution
(-) Fixed Costs
Gross Profit
(-) Income Tax/Corporation Tax
Net Profit
To fully understand income, it’s essential to also grasp the types of costs involved in running a business. Let’s break these down:
Key Financial Terms Every Business Owner Should Know
1. Sales/Revenue - Sales, also known as revenue, represents the total value of goods or services you’ve sold within a specific period. It’s the starting point for calculating your business’s financial health.
2. Variable Costs - These are costs directly tied to the production or delivery of your goods or services. For example, materials or labour directly required to fulfil an order. Variable costs only occur when you provide a product or service.
3. Contribution - When you subtract variable costs from sales, you arrive at your contribution margin. This figure represents the profit you’ve earned from each unit sold before accounting for fixed costs.
Service-based businesses often enjoy high contribution margins because variable costs tend to be lower for delivering services.
4. Fixed Costs - These are expenses that remain constant regardless of your sales volume. Examples include rent, utility bills, and salaries. When you subtract fixed costs from your contribution, you arrive at your gross profit.
5. Gross Profit - Gross profit is a critical metric. It’s common for start-ups and small businesses to have a good contribution but achieve zero gross profit in the early years - This simply means you have made enough sales to cover all your fixed costs - Break even! Reaching this milestone a significant achievement worth celebrating!
6. Income Tax/Corporation Tax - Once your business generates profit above a certain threshold, you’ll need to pay income tax (if you’re a sole trader) or corporation tax (if you run a limited company).
7. Net Profit - Net profit is what remains after deducting all expenses.
Is Net Profit Yours to Take Home?
Not quite. While this is a topic for another say, let me leave you with a hint - Reinvestment.
Take Control of Your Business Finances
By mastering these financial basics, you’ll be better equipped to make manage cash flow and strategic decisions. Remember, financial literacy doesn’t require a degree in accountancy—it starts with understanding the fundamentals and applying them to your business operations.
If you’re looking for personalised coaching, Million Goals is here to help. With 121 and Group coaching tailored to UK entrepreneurs, start-ups, and small business owners, you can achieve your financial goals and take your business to the next level.
Written by
Mrudula Muralidharan
Founder & Finance Coach
Million Goals
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