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September 24, 2021
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Business Finance

FINANCE BASICS FOR SMALL BUSINESS OWNERS

There are some things you should know how to do as a business owner and leader. One of the most important–understanding your business’s finances. Some business owners feel that finances are not their strength so they shy away from that aspect of their business. But, this creates a vicious cycle the less time you spend on the numbers the less you know about what’s going on with your money and the next thing you know things have gotten completely out of control and you’re going out of business.

Leadership Equals Financial Literacy

When you decided to start your business, you may not have expected that you would need to become so familiar with the financial side of things. You thought you’d be making big-picture decisions. You might even think it a good business decision to outsource the bulk of the finances and bookkeeping. Handing off the financial tasks to someone who is better at running the numbers isn’t necessarily a bad thing. In fact, you should definitely have a professional do taxes (because business taxes are complicated!). But, as the business owner, you must be knowledgeable on what’s going on in your business and have enough financial literacy to keep an eye on the health of your company if you want to stay in business.

Know Your Numbers

No matter the reason you started your business, if you don’t know your numbers you won’t be in business for very long. If you know what’s going on in your business, you’ll be able to make better, more informed decisions. You have to know things like:

  • Is your business losing money?
  • What are your annual top-line revenue and monthly run rate?
  • What’s your bottom line based on expenses and revenue?
  • What the difference between your business’s income and profit?
  • What’s your burn rate and is it sustainable?

Some of those terms might sound like Greek to you. To get to all of that information, you first have to start with these 3 foundational reports:

Balance Sheet

A balance sheet is basically a snapshot of a business’s assets, liabilities, and shareholders’ equity. Ideally, you should be looking at your balance sheet daily, that way you will be so familiar with it that you will notice immediately if something is amiss. Knowing your numbers is a discipline and a habit!

Some important things to ask yourself when looking at your balance sheet:

  • What’s my cash balance?
  • What’s the bank say?
  • What accounts receivable are out there?
  • What’s the inventory balance?
  • What’s my next principal or interest payment?

Income Statement or Profit and Loss Statement

An income statement captures how much revenue was earned and expenses were paid over a specified time period and shows the profitability of the business.

Cash-Flow Statement

The cash-flow statement allows you to see the money in and money out. It might seem like the same thing as the Income Statement, but it can actually allow you to see if your business generated or lost cash during the specific time period.

Successful Businesses Run on a Budget

One of the cornerstones of maintaining a financially viable business is setting and operating off of a budget. A budget gives you something to aim for and to measure success by. It can also help you:

  • Keep expenses accountable
  • Set goals and parameters
  • Help forecast cash flow
  • Help determine potential growth

Do you have a business plan? That could serve as your basic budget. Use historical data (such as last month’s profit and loss statement) to build your budget.

Tap Into Your Resources

No matter how many times you run the numbers, knowing the basics of business accounting is foundational to staying in business. If you feel you still lack the knowledge or confidence in knowing your numbers, get help! There are many ways you can brush up on your financial literacy skills, consider some of these:

  • Take a basic business accounting course
  • Hire an accountant to audit your books and check the health of your financials
  • Link up with a mentor who has a proven and successful business
  • Invest in accounting software to make getting intimate with your finances easier

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