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