Business owners rarely go into business to deal with the financial aspects of running a business. It's easy to understand why! You are passionate about the products or services you provide and want to focus your time there. The financial aspect usually falls to the bottom of the "desired responsibilities" list. It is critical to the long-term success of your business that you understand some of the Financial Fundamentals of being a business owner though. You don't have to be an accountant or financial analyst, but it is important that you have some key skills in your business toolkit to measure the financial aspects of your business. It's okay to outsource this activity so that someone else can do the work you don't like to do, but make sure you understand the output of the financial information. You'll need it to help you make informed decisions about your business. Remember! Accounting is not just about taxes. There's so much more to know about the numbers, so you'll know how your business is doing from the management perspective.
There are a variety of key aspects of your financial picture that you need to be aware of and they can be outlined based upon the three critical financial statements: Profit/Loss, Cash Flow, and Balance Sheet.
I meet with entrepreneurs every day that are unsure of their profitability. They "think" they are making money because they have money in their checking account. This is NOT how you should be running your business. Having money in your checking account doesn't mean you are profitable. It could mean you haven't paid all the bills so you have a little cash. Cash and profit are two different concepts. If you aren't profitable, you won't have longevity in your business.
So what is the difference between profit and cash? Profits are determined through an equation of Revenues ? Cost of Goods Sold = Gross Profit ? Overhead Expenses = Net Profit. This equation is the makeup of your Profit/Loss Statement. Revenues are dollars from generating sales within your business. Cost of Goods Sold reflects the direct costs for labor and materials incurred in your business. Overhead Expenses are all those other costs that you incur so that your business can function (i.e. Rent, Taxes, Insurance, Marketing, Accounting, etc.)
You can have activities that affect cash but are not considered revenues or expenses. For example, when you borrow money from a lender, it is not considered income. It is classified as an increase in your liabilities (i.e. debt). When you repay that loan, it will not be considered an expense. It is a reduction in your liability. Any interest you might incur on that loan would be classified as interest expense, but the principal portion is not. Similar concept applies for owner investments and withdrawals.
Often times the two concepts of cash and profit are not clearly defined for small business owners; therefore, you don't have a good handle on your finances and how to interpret any outcomes from financial reporting. You can show a profit and have a negative cash flow if your loan payments, owner withdrawals, and other non-expense activities are taking more cash out of your business than you have profit. Same goes for the opposite flow, you can have a lot of cash coming into the business through an increase in personal or lender-financed activities vs. revenues. The most basic of cash flow statement information can be outlined as Beginning Cash Balance + Cash Inflows ? Cash Outflows = Ending Cash Balance. It's important for you to understand the concept of your Profit/Loss Statement and your Cash Flow Statement. They provide two different views of our business.
The third financial statement you should be preparing monthly is the Balance Sheet. The Balance Sheet provides information on your Assets, Liabilities and Equity. Assets are what you own that is of value. Examples include Bank Accounts, Accounts Receivable, Inventory, Property, Plant, and Equipment. Liabilities represent your obligations to others. Examples of liabilities include Accounts Payable, Notes Payable to Lenders, Loans from Shareholders, etc. The Equity balance reflects the value of your ownership in our business. When you take the value of the assets less the value of your liabilities, the remainder is your equity.
It doesn't matter the size of your business, profitability and ongoing financial stability is something you should be monitoring on a regular monthly basis. Some will say that they are too small for creating financial statements. That is your way of not holding yourself accountable to managing your business wisely. It'll always be someone else's fault when your business fails?or at least that is what you'll say. Though it won't be the truth, it'll be your fault for not managing your business wisely. You can choose to succeed, or to choose to fail. It is always a choice, not a default. So make the choice to be a financially informed business owner. Your business will thank you through increased profitability and longevity!
Contact: Pam is the author of Out of the Red, a book that covers various important aspects of management accounting for small business owners. Topics include Break-Even Point, Cash vs. Profit, Budgeting, and more. To order your copy, call 816.304.4398.
For more information, you can visit the website at http://www.rppc.net
Pam Newman is a Certified Management Accountant, Author, and Certified QuickBooks® ProAdvisor for Financial and Point-of-Sale software.
![]() |
|
![]() |
|
![]() |
|
![]() |
In today's economic climate, the first priority for the small... Read More
Just as you are about to say "good-bye" to your... Read More
This year, some 700,000 American businesses will be sold. Most... Read More
As small business owners we're in business to make money... Read More
The story is told of a tiger chasing some goats... Read More
If you are a small business you know that you... Read More
When is it a good thing to say no to... Read More
How careful are you with the data you collect from... Read More
Success is the desire of everyman on the face of... Read More
As a solo entrepreneur or small business owner, one of... Read More
The current lack of industry leaders represents an exceptional opportunity... Read More
As a Boat Detailing Specialist, you may want to offer... Read More
What kinds of things effect mobile service businesses P and... Read More
Every business regardless of size needs a "Business Image Manual"... Read More
It's the dream of every person who starts a business... Read More
You want to know more about making money with your... Read More
Hew Hampshire car wash market. Well we have visited every... Read More
Buying a franchise is not for everyone. This guide will... Read More
Many physical therapists in private practice have the appearance of... Read More
You see it often in large shopping complexes. Customers seem... Read More
Home based travel businesses are no longer the wave of... Read More
If you've been thinking about starting a business, but are... Read More
How far can you go based on your relationship with... Read More
The Workers' Compensation situation in this country is unbelievable. Why,... Read More
Lance Armstrong this week won an unprecedented 7th Tour de... Read More
Financial Consultants are one of the fastest growing industries today.... Read More
Some of the very qualities that attract people to the... Read More
Running a business on the net these days can be... Read More
Ok, so next to the taxman, your company payroll department... Read More
Many times small businesses want to expand their businesses and... Read More
Large corporations use employee manuals to both educate employees about... Read More
You can make your trade show experience much easier by... Read More
Introduction: This article is written as a general discussion on... Read More
What types of companies do you want to align yourself... Read More
Debt collection letters--an overview"Debt collection letter" in the singular may... Read More
You've always liked flowers and you think the idea of... Read More
How do you find the best business partners?Finding a good... Read More
A reader of one of my online sessions asked should... Read More
I'll be the first to admit that I went a... Read More
We all know that competition is an ugly word but... Read More
In a quest for customers and to keep those customers,... Read More
It's obvious when a small business has accepted the fact... Read More
How do you make sure you have the business solutions... Read More
Some of the greatest words of wisdom for any man... Read More
A successful joint venture marketing effort is the goal of... Read More
Some of the very qualities that attract people to the... Read More
There is a Batting Cages Business for those people who... Read More
Paper Shredding Business Opportunities are blossoming up everywhere because in... Read More
Every home business has the same problem of how to... Read More
Many mobile car wash operators would like to add de-ionized... Read More
There's been a recent rise in the number of elderly... Read More
It is estimated that 78% of all small business start-ups... Read More
If you run a pressure washer business you need complete... Read More
How a donation is different from a sponsorship and what... Read More
Whether you operate a chain of restaurants, a mom-and-pop convenience... Read More
Q: I'm curious. What is the dumbest business question you've... Read More
Discover How Specialized Cost Containment Creates A New Win-Win Position... Read More
SBIR vs. STTR: If you are participating in the SBIR... Read More
Your product is dying. With the same inevitability that we... Read More
There are many choices when thinking about a small business... Read More
I ran a franchise company for many years, a car... Read More
Fuel prices these days are quite high and they take... Read More
Remember those drawings from science class of how a lever... Read More
More sales and more profit. Isn't that what you want... Read More
Contrary to popular belief, small businesses can survive a crazy... Read More
If you intend to franchise your company you will need... Read More
Small Business |