Getting Your Head Around Basic Business Finance

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finance

The goal of any business is ultimately to generate profit, and in order to do so it’s vitally important to constantly keep careful track of finances. Amongst many aspects of running a business you need to know, basic finance is a high priority.

There’s much you can do to help share the responsibilities for financial affairs, such as hiring a good accountant and using modern accounting software to accomplish financial admin including automated production of paperwork such as deposit slips and checks.

Ultimately though, it’s important to have an understanding of basic business finance so you understand at any given time the financial well being of your company.

The three pillars of financial management

There are three basic financial documents that enable you to understand ‘how things are’ financially:

  • Balance sheet
  • Profit and loss account
  • Cashflow statement

Balance sheet

A means to provide a snapshot of your business’s performance and general financial health.

The balance sheet shows you where money arrived from and whereabouts it is now; it shows what the assets are including stock and cash and debts.

You may have heard the term “they could sure read a balance sheet” in praising someone’s business acumen; being able to understand what it’s telling you will help you immediately ‘get a handle’ on your business’s finances.

Profit and loss account

This shows revenue flowing into the business and how it is transferred to the net income; basically it’s what’s left after all the expenses have been taken into account.

This helps show the true profit you’re making and points to how much it costs to deliver your service or product – important information when assessing how to perhaps increase profits by reducing costs.

Cashflow report

A business has money flowing in and out constantly, and it’s possible for an otherwise successful business in terms of sales to struggle purely because too much money is going out versus money coming in.

A regularly updated cashflow report is very much like taking your business’s pulse and understanding what the cashflow report is telling you can help you understand if there is an issue and enable remedial action to be taken.

You may think that your accountant’s job is to prepare the above; indeed, for presenting information to the IRS (Internal Revenue Service) an accountant should ideally be hired to prepare documents such as the balance sheet, but it’s still important for you to understand what it and the others discussed above are showing you.

Employees and payroll

As soon as you hire others, you’ll need to institute a reliable payroll admin regime so as to not only pay your staff but to deduct taxes and other deductions properly to satisfy the IRS.

As touched on earlier, there are various accounting systems available for businesses of all sizes and types to make the task easier.

Tax

You’re likely aware that you may be liable for tax on business profits once expenses have been deducted, but there are various other taxes you may be liable for – and they can differ from one state to another.

For example, if you sell items in a retail sense you’ll likely be liable for sales tax and – if you own the premises you operate from – maybe a property tax will apply.

Being aware of your yearly tax burden will help you plan for it, submit the required information to the IRS in good time and ensure you have the money on hand to pay taxes when they’re due.

Stock control

If you carry stock, then understanding the financial implications will help save money and avoid being either under or over stocked at any given time.

Money tied up in stock needs to be controlled as far as possible; two methods to achieve this are negotiating better terms with suppliers and using a modern stock control system linked to a POS (Point of Sale) system. This helps ensure stock is replaced in line with how quickly it sells so avoiding slower selling stock tying up capital or running out of faster moving items.

Use professionals

As mentioned, you may well use an accountant to at least prepare your yearly taxes but they can be of even more help in preparing and helping you interpret financial information.

Along with your own regular monitoring of aspects such as the balance sheet and cashflow report, perhaps ask an accountant to ‘run the rule’ over your finances perhaps every quarter to help spot things you may have missed and enable you to learn more.