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