| Business owners rarely go into business to | | | | investments and withdrawals.Often times the |
| deal with the financial aspects of running a | | | | two concepts of cash and profit are not |
| business. It's easy to understand why! You | | | | clearly defined for small business owners; |
| are passionate about the products or services | | | | therefore, you don't have a good handle on |
| you provide and want to focus your time | | | | your finances and how to interpret any |
| there. The financial aspect usually falls to | | | | outcomes from financial reporting. You can |
| the bottom of the "desired responsibilities" | | | | show a profit and have a negative cash flow |
| list. It is critical to the long-term success | | | | if your loan payments, owner withdrawals, and |
| of your business that you understand some of | | | | other non-expense activities are taking more |
| the Financial Fundamentals of being a | | | | cash out of your business than you have |
| business owner though. You don't have to be | | | | profit. Same goes for the opposite flow, you |
| an accountant or financial analyst, but it is | | | | can have a lot of cash coming into the |
| important that you have some key skills in | | | | business through an increase in personal or |
| your business toolkit to measure the | | | | lender-financed activities vs. revenues. The |
| financial aspects of your business. It's okay | | | | most basic of cash flow statement information |
| to outsource this activity so that someone | | | | can be outlined as Beginning Cash Balance + |
| else can do the work you don't like to do, | | | | Cash Inflows - Cash Outflows = Ending Cash |
| but make sure you understand the output of | | | | Balance. It's important for you to understand |
| the financial information. You'll need it to | | | | the concept of your Profit/Loss Statement and |
| help you make informed decisions about your | | | | your Cash Flow Statement. They provide two |
| business. Remember! Accounting is not just | | | | different views of our business.The third |
| about taxes. There's so much more to know | | | | financial statement you should be preparing |
| about the numbers, so you'll know how your | | | | monthly is the Balance Sheet. The Balance |
| business is doing from the management | | | | Sheet provides information on your Assets, |
| perspective.There are a variety of key | | | | Liabilities and Equity. Assets are what you |
| aspects of your financial picture that you | | | | own that is of value. Examples include Bank |
| need to be aware of and they can be outlined | | | | Accounts, Accounts Receivable, Inventory, |
| based upon the three critical financial | | | | Property, Plant, and Equipment. Liabilities |
| statements: Profit/Loss, Cash Flow, and | | | | represent your obligations to others. |
| Balance Sheet.I meet with entrepreneurs every | | | | Examples of liabilities include Accounts |
| day that are unsure of their profitability. | | | | Payable, Notes Payable to Lenders, Loans from |
| They "think" they are making money because | | | | Shareholders, etc. The Equity balance |
| they have money in their checking account. | | | | reflects the value of your ownership in our |
| This is NOT how you should be running your | | | | business. When you take the value of the |
| business. Having money in your checking | | | | assets less the value of your liabilities, |
| account doesn't mean you are profitable. It | | | | the remainder is your equity.It doesn't |
| could mean you haven't paid all the bills so | | | | matter the size of your business, |
| you have a little cash. Cash and profit are | | | | profitability and ongoing financial stability |
| two different concepts. If you aren't | | | | is something you should be monitoring on a |
| profitable, you won't have longevity in your | | | | regular monthly basis. Some will say that |
| business.So what is the difference between | | | | they are too small for creating financial |
| profit and cash? Profits are determined | | | | statements. That is your way of not holding |
| through an equation of Revenues - Cost of | | | | yourself accountable to managing your |
| Goods Sold = Gross Profit - Overhead Expenses | | | | business wisely. It'll always be someone |
| = Net Profit. This equation is the makeup of | | | | else's fault when your business fails...or at |
| your Profit/Loss Statement. Revenues are | | | | least that is what you'll say. Though it |
| dollars from generating sales within your | | | | won't be the truth, it'll be your fault for |
| business. Cost of Goods Sold reflects the | | | | not managing your business wisely. You can |
| direct costs for labor and materials incurred | | | | choose to succeed, or to choose to fail. It |
| in your business. Overhead Expenses are all | | | | is always a choice, not a default. So make |
| those other costs that you incur so that your | | | | the choice to be a financially informed |
| business can function (i.e. Rent, Taxes, | | | | business owner. Your business will thank you |
| Insurance, Marketing, Accounting, etc.)You | | | | through increased profitability and |
| can have activities that affect cash but are | | | | longevity!Contact: Pam is the author of Out |
| not considered revenues or expenses. For | | | | of the Red, a book that covers various |
| example, when you borrow money from a lender, | | | | important aspects of management accounting |
| it is not considered income. It is classified | | | | for small business owners. Topics include |
| as an increase in your liabilities (i.e. | | | | Break-Even Point, Cash vs. Profit, Budgeting, |
| debt). When you repay that loan, it will not | | | | and more. To order your copy, call |
| be considered an expense. It is a reduction | | | | 816.304.4398.For more information, you can |
| in your liability. Any interest you might | | | | visit the website at Newman is a Certified |
| incur on that loan would be classified as | | | | Management Accountant, Author, and Certified |
| interest expense, but the principal portion | | | | QuickBooks(R) ProAdvisor for Financial and |
| is not. Similar concept applies for owner | | | | Point-of-Sale software. |