Let’s be honest: almost no one starts a business because they love to deal with Finance. Yet, managing a small business requires a solid understanding of accounting. Accounting errors can be costly, and proper bookkeeping and data keeping can discourage even the bravest. This fear is largely caused by a lack of knowledge, so it is useful to have a familiarity. Here are some introductory topics that are good to know about the finances of a small business.
Technical conditions
If you do not know about economics, at first the terminology and expressions of space may surprise you. The most important terms that you need to know are as follows:
Gross revenue
The total amount of money you have received from your customers before calculating the following:
Cost
Any expense incurred in running the business: wages, rents, taxes, etc. When deducting expenses from gross income, the…
Net income
If the number is positive, you make a profit, that is, you make money. If it is negative, you have a loss, that is, you lose money. If it is equal to zero, then the enterprise has reached…
Break-even
As long as a business pays its initial costs and tries to increase sales, it is normal for it to operate at a loss. So break-even is a great milestone for a business, and it’s important to know where it is, that is, to know how much expense you have and how much gross revenue you need to get positive net income. Equally important are the…
Cash flow
This size lets you know if you have enough cash to pay your bills. Even a profitable business can have a cash flow problem if its spending is made at a bad time relative to sales. Thus, it is important to arrange your finances so that you always have cash at your disposal.
Paperwork
At all enterprises there are many documents, but the most important are the following:
Balance sheet
It provides a complete and general picture of the company’s finances. Includes assets (property), liabilities (debts) and equity (investments). The balance sheet is said to be” balanced ” when the firm’s assets equal liabilities plus equity.
Statement of profit and loss
It is a summary of the year’s income and expenses, which allows you to calculate net income. It is important to keep it up to date so that you understand the break-even point and the efficiency of the business.
Statement of cash flows
It records cash inflows and outflows, through income and expense, respectively. If the inflows are greater than the outflows, then your business has positive cash flow, which is good!
Revenue forecast
It estimates how much revenue the business will have next year, based on past experience, number of customers and plans to increase operations. If you have an accurate revenue forecast, you will be able not to get out of budget.
Receiving payments
Since invoices are the means by which you demand money from customers, proper pricing is very important for a healthy cash flow. This means issuing them on time, having strict but reasonable payment terms (a 30-day margin is common) and settling late payments. You can also try tactics that encourage quick payments, such as giving a discount to those customers who pay, for example, within two weeks.
Useful software
The time has passed when running a business needed a thousand or two files and a folder of papers. Now there is accounting software, which can make things much easier, save you time and save you from paperwork. Very good and popular options are applications FreshBooks, Quickbooks Online and Xero.
Cooperation with an accountant
It’s always a good idea to have a professional accountant at your disposal, because most small business owners don’t have time to keep track of everything without risking expensive mistakes. An accountant can keep your books, help you with tax issues, file tax returns, or advise you before you make big decisions on financial matters. In any case, it is good to feel confident that you are receiving the support of a specialist.
