Appropriately managing your small business’ finances is critical for long-term success. Smart financial management should be a top priority for all small business owners and we’re here to help you empower you to make educated decisions that are best for your small business! Let’s go over some of the basics to help you get started.
The definition of Financial Management is efficient organizing, managing, controlling and filing of all of your small business’ funds — it’s essentially the “number crunching” of your small business. You have dollars coming in when you make a sale and dollars going out when you hire new employees, install software to help run your small business, etc. There is a difference between Accounting and Bookkeeping — Accounting is the management of a small business’ finances and is based on a general set of tax and accounting principles. Bookkeeping comes before Accounting — it is the maintenance of your small business’ financial records. Accountants may also provide bookkeeping services. When you are ready to hire someone to help you manage the finances of your small business, remember to ask them if they can provide you with both services.
Accurate and timely bookkeeping is very important! Whether you learn it yourself and manage your own books, or you would like to hire someone to help, here are some key terms to familiarize yourself with:
A Chart of Accounts is a complete list of all the company’s accounts. Think of these as buckets for the accounts you manage — what you own, what you owe, and what’s coming in. Your Balance Sheet should clearly state your Assets (what you own) and your Liabilities (what you owe). Your Income & Expense reports should include your Income Accounts (type or source of income) and your Expense Accounts (type and purpose of spending). Your Income is money earned through selling goods or services. Your Expenses are anything you spend money on to make your business run. Net Profit (or Loss) is what’s generated when you take your Income minus your Expenses. Keeping on top of your small business’ Net Profit (or Loss) can help you determine when you can hire, add additional services/goods, or expand to another location.
Your Assets may be money in the cash register, money in the bank account, technology (e.g. computers, phones, printers, etc.), company vehicles, etc. Your Liabilities include things such as your employees/payroll, contractors, fees/penalties/taxes and credit card debt. Additionally, your Assets minus your Liabilities is what’s known as Owner’s Equity.
When it’s time to pull reports, there are a few financial statements to review. Your Income Statement, also known as your Profit & Loss Statement (or P&L Report), provides you what was earned (Income), what was spent (Expenses), and what value your business holds (Net Profit).
Your Balance Sheet, also known as the Statement of Financial Condition, lists your Assets (what you own), your Liabilities (what you owe), and the Owner’s Equity (the Assets minus the Liabilities). What’s important to obtain from this report is that your small business’ profit increases its equity and loss reduces your equity. Every month you generate more profit, the more your small business is worth, and vice versa.
Now that you’re aware of the key terms and types of reports, it’s time to analyze the results! If your report results indicate a “Breakeven,” that means your Income minus your Expenses equals zero. When this happens, it’s a good time to ask yourself, “what else can I be doing to generate more income for my small business?” Or, if you’re in an inflationary period and your costs go up, you may need to increase prices or market your small business to increase your Income.
Another way you can do analysis is by Benchmarking. This process is where you pull market research data to determine how your small business is performing relative to other small businesses in your industry. You can also obtain information about the cost of goods and services across your industry. This analysis empowers you to be competitive in your small business’ market.
Projections are another way to analyze your small business’ financial performance. Projections involve forecasting what your Income or your Expenses will be throughout the year, and help you stay engaged in your small business’ performance. Projections help keep you honest about your small business’ financials and show trends you can review for future planning.
Financial management doesn’t need to be overwhelming — we’re here to help you! If you have questions about any of the above, or you’d like to talk through what course of action may be best for your small business, we offer expert, no-cost one-on-one small business consulting.