Business Finance Basics

Is your business making money? Are you profitable or just kind of stuck year over year. How much revenue did that marketing investment generate? Are you paying yourself what you should be each month; have you even paid yourself at all? All very important questions when running your business. And in order to successfully answer any of those questions, you need to have some essential business finance basics implemented. Being the CEO of your business means being on top of your business finances.

Here are a list of Business Finance Basics every business owner should know:

Profit & Loss Statement:

Want to easily see how your business is doing and make key decisions on marketing expenses, revenue streams and which expenses to cut out? A profit & loss (P&L) statement will help you do just that, plus support you with other key business decisions like how much to set aside for taxes or to pay yourself monthly. Also known as an Income Statement, it shows a company’s revenues and expenses during a specific period. It also shows the business net income and is an overall indicator of the company’s health.

A profit & loss statement should be created at the level of detail necessary for you to gain a clear understanding of how your business is truly operating. A P&L statement is knowledge and knowledge is always power.

Balance Sheet:

Referred to as the heart of the business, a balance sheet is a statement that details the company’s assets, liabilities and shareholders’ equity at any given point in time. Why do you need a balance sheet? Because it easily shows whether your business has the ability to pay for its short term operating expenses, future debt obligations and pay dividends to the owners. A balance sheet or statement of financial position is referred to when you want to know exactly how much cash is on hand (business assets) or how much debt is owed.

Bookkeeping:

Bookkeeping is creating the books. This refers to the process of recording a company’s financial transactions which then creates the company’s profit and loss statements and balance sheet. Without proper bookkeeping, you will not have accurate financial statements. That is why bookkeeping is a must in business finances. Unlike an accountant which is a mandatory part of your CFO team, a bookkeeper is not. So you have two options when it comes to bookkeeping; either do it yourself or hire a bookkeeper. There are pros and cons to both options so make sure you are making a CEO decision when choosing to hire a bookkeeper or do the bookkeeping yourself. Even if you decide to hire externally, make sure you are checking your business finances on a monthly basis. You will never meet a successful CEO that waits until tax time to review their business statements.

Invoicing:

This is literally how your business collects on the products and services you offer. Missed opportunities in creating invoicing systems and processes means you could be missing out on time sensitive payments and basically getting paid on time. Look at streamlining how you invoice your clients and customers. There are software integrations available that will connect directly to accounting systems and third party payment platforms so that your invoicing is seamless and you spend less time chasing your money. In addition to external systems, make sure to set up internal processes to address late payments at regular intervals.

Business Accounts:

One of the very first steps you should do is separate your business accounts from your personal accounts; and yes, you CAN have a business account even if you are self-employed. In addition to making it easier to keep track of your business finances and spending, having a separate business account will shift your mindset to that of a successful business owner vs being an entrepreneur who is trying to “make it”. Having separate business and personal accounts allow you to see how the business is performing and make better business decisions to grow and expand. You have less of a risk of using business funds for personal purposes and it reduces stress, time and money when preparing your financial statements for tax purposes.

Organizing Receipts:

Grabbing all the receipts from the bottom of your purse once a month is not a process for keeping your receipts together. In fact, it’s the complete opposite. Instead, create a process to keep all of the receipts organized whether it’s paper or electronic. There are options where you can upload your receipts directly to an accounting system or even external receipt apps which allow you to keep all of your receipts on a hard drive or saved on the cloud. Either way, create mini processes as necessary, like labeling a folder in your inbox where you move receipts to file and clear it out once a week. Or have a physical folder where you file receipts you have uploaded and saved.

Setting up your business with these finance basics ensures that the systems and processes you set up now will easily grow with you as your business expands tomorrow.