Financial Fundamentals - What Every Small Business Owner Should Know!

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