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Small Business Finance Basics
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You had an idea for a business. And you went for it. Way to go! Now, as you build your business model and launch your business, you’ll need to know a whole set of accounting buzzwords. Here are the business finance basics every small business owner needs to know.
Financial literacy
- Gross revenue. This is the total, or sum, of all monies you receive from customers in exchange for your products and/or services before taking out deductions or expenses (rent, taxes, payroll, cost of goods sold, etc.).
- Expenses. Any time you spend money to keep your business going, that’s an expense, sometimes called an “operating expense.” This includes taxes, rent, payroll, marketing costs, interest on loans, utilities, POS software, business insurances, professional fees, cost of materials for goods, etc.
- Net profit/income/earnings. Also called your “bottom line,” this is the amount of revenue left over after subtracting all of your operating expenses from your gross revenue. If the number is positive, your revenue was greater than your expenses and you’ve made a profit, congratulations! If it’s negative, then you’ve lost money.
- Cash flow. Cash flow measures the difference between the cash available in your business’s banking account at the start of the accounting period compared with the end of the period. Having a positive cash flow allows your business to pay operating and direct expenses, principle debt services, and the purchase of assets. The cash can come from sales, loan proceeds, investments, and the sale of assets.
- Break-even point. This is the point a business reaches before it’s profitable, when total revenues equals total expenses. It’s not uncommon for new small businesses to operate at a loss (expenses are greater than revenues) for the first several months or even years.
Most important business accounting documents
Amongst all the other paperwork a small business owner must wade through are these crucial financial documents.
- Balance sheet. Your balance sheet shows the business’s overall financial standing and health at a given moment. It lists the assets, liabilities, and equity your company holds, which is used to calculate the net worth of your business. A maintained and updated balance sheet should show total assets equaling liabilities plus equity of the business.
- Income statement. An income statement (also called a profit and loss or P&L statement) summarizes all of your business’s revenues and expenses in the year. It allows you to calculate if you made a net profit, reached the break-even point, or incurred a loss.
- Cash flow statement. This document tracks the business’s cash flow during a set time period, usually a month or a financial quarter. Revenue inflow comes from selling goods and receiving payment on invoices while outflow comes from purchasing inventory, making payroll, and paying other overhead expenses.
- Revenue forecast. So far, the listed financial documents have shown how the company has done in the past financially and how it stands currently. A revenue forecast takes this information and makes an informed prediction for how the business will do in the upcoming year. This helps you stay on budget and helps you decide if and how much you can afford to spend on new marketing campaigns, hiring new employees, expanding your location, etc.
Accounting software or business accountant?
Accounting software can be a valuable tool when it comes to managing your small business finances; however, there are still some areas that require a professional accountant. To find the right accountant for you and your business, ask your business lawyer or a finance professional at your credit union for recommendations. You can also contact the Society of Certified Public Accountants for a referral.
An accountant can review your books and look for errors, help file taxes, and make recommendations for big financial decisions. They should be a certified public accountant (CPA) as well as a good personality fit for you. After all, you’ll want to stay involved in your business’s finances even after you hand over some responsibilities, so you should be able to work well with whomever you hire.
Being knowledgeable in the basics of small business finances and confident in your accountant are the best ways to avoid identity theft and fraud and ensure the success of your beloved small business!