Learn What Goes Into your Small Business Finances

Small Business Finance Basics

As you begin to learn the basics of what goes into your small business finances, there are three critical tools you should understand.  1. Income Statements, or a profit and loss (P&L) statement, use a basic formula to calculate your company’s profit. This formula is revenue – expenses = profit. However, this tool does not give you enough information to accurately assess your business’ profit, as it works on an accrual basis. Your income statement can be healthy, showing revenue coming in, but you are not able to collect it. 

There are several key performance indicators (KPIs) to monitor as you use your income statement. These metrics give you information on all of your transactions and intel on your company’s growth. 
  • The number of sales/subscribers /active users/$ Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR)
  • FTEs, or Full-Time Equivalents (employees)
  • Revenue per FTE 
  • Expenses per FTE
As you begin to monitor these various numbers, it is important to remember that the income statement is what any investor, accountant, or business mentor will want to see first. This tool is also what you will use to report to the government. While you begin to master small business finances, make maintaining a clean and concise income statement a priority. 

2. Cash Flow Statements fill in income statements’ gaps because they outline the tangible cash that your business currently has in its possession. Using this tool, small business owners can know exactly how much cash your company is earning and how much is exiting your business through expenses like employee salaries, rent, and supplies.

3. A Balance Sheet, the last of the three fundamental financial statements, shows all of your company’s assets and how these assets are financed. You can use this tool to calculate your small business’ net worth and evaluate your current financial position.

Once small business owners have an understanding of each of these critical statements, they can then begin deriving financial projections. 

 

Want to read more about simplifying your small business finances? For more information, click here.

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