A Simple Way to Track Your Business Finances

Financial awareness of your business is a critical part of tracking your performance. Once equipped with accurate financial information, you can make important business decisions that can mean the difference between a healthy company or failure. Here’s a quick guide on what you need to know about your business’s finances:

Cash Flow & Balance Sheet

Cash flow statements monitor the capital going in and out of your business. In addition, a balance sheet displays your assets, liabilities, and capital on hand. Use cash flows and balance sheets to understand if and when you will run out of money. Here are the most common components to know:

Cash Flow

  • Income — Proceeds from selling your offering (e.g., inflows, revenue, sales, earnings, goods sold, credits).
  • Expenses — Paying yourself, your employees, and service providers to run your business. Be sure to create a budget to estimate expenditures over time (e.g., outflows, costs, debits).
  • Capital Contributions — Investor money coming into your business.
  • Reinvested Capital — Recycled profits going back into your business.
  • Capital Distributions — Transferred money going out to investors. Note that this may also occur when your business terminates (e.g., dividends, redemptions, disbursements).

Balance Sheet

  • Assets — Owned items such as vehicles, real estate, computers, or intangibles like intellectual property.
  • Liabilities — Borrowed items such as loans/debt, lines of credit, or credit cards.

Performance / P&L

There are two main components obtained from your cash flow that drive financial performance — (2) income, your sales, and (b) expenses, your costs. Performance is typically measured over a period of time; monthly, quarterly, or yearly — and demonstrates the amount of income your business has made after all expenses are paid. Use a P&L statement (profit & loss) to better understand your performance, and your ability or inability to generate profits.

P&L Example for ACME BAKERY:

*More definitions at the end of this article

Profit & Margins

After determining that you can generate profits from your P&L, capture *how profitable* you are from net profit, which is income minus expenses. Next, calculate your net margin to reflect your performance as a percentage of your income. Essentially, this is the number of cents you keep for every dollar of income. In the above example, ACME Bakery will only take home $0.08 for each $1 of income generated (8% net margin); although $100K in income was generated from $25K in COGS (75% gross margin). In this illustration, the main driver reducing ACME’s take-home profit was labor costs. Use this information to discern how much of your income is flowing to the bottom line, and where you can make pricing or payment adjustments.

More P&L Definitions:

  • COGS (cost of goods sold) — Direct costs for the materials and production of your offering, plus the *direct* labor costs used to produce it.
  • Labor — Generalist employees, administrative costs like executive assistants, janitorial workers, and other non-production jobs that are excluded from COGS. This may also include labor insurance and labor taxes for larger businesses.
  • Supplies — Maintenance such as paper, pens, or staplers.
  • Rent & Utilities — Place of business and utilities such as internet or telecom.
  • Marketing — Branding such as your website, online presence, or business cards.
  • Gross Margin — Income minus cost of goods sold divided by income.

Financial management is an important part of your business’s performance. Use tools like your P&L and cash flow to grasp your financial standing early, so you can stay strong financially.


More Articles:

Business Planning
The 10-Point Checklist to Launch Your Business
12 Steps to Scale a Business
How to Calculate Market Size
7 Steps To Assess Your Competition
Competitive Advantages That Last
Finding The Right Customer Profile
How To Measure Results
Know Your Niche & Costs
Developing a Go-to-Market Plan (GTM)
4 Steps of Customer Discovery Before You Launch

Pitch Decks & Messaging
How to Make a Pitch Deck for Your Fund
How to Write an Investor Update (With Example)
How to Write a One Pager
9 Easy Steps to Build Your Company’s Messaging
How to Make a Great Pitch Deck

Fundraising
3-Month Fundraising Plan — Priced Equity Round

Operations
A Simple Way to Track Your Business Finances
The First Service Providers To Hire For Your Business
Who Should You Hire Next?
Customer Service Basics
Save Your Business in 60 Days: Cutting Costs — Part 1
Helpful Tips for Better Operations
5 Ways to Productize Your Business

Sales
How Your Sales and Operations Can Thrive Post-COVID-19
Save Your Business in 60 Days: Increasing Sales — Part 2

Civic Engagement
The Importance of Denouncing Racism

Kaego Rust is CEO at KHOR Consulting. If you’re looking for help, contact kaego@khorconsulting.com or visit www.khorconsulting.com.

Photo by 3D Animation Production Company

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Kaego Ogbechie Rust

Kaego Ogbechie Rust

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CEO at KHOR Consulting, helping companies build business plans, pitch decks, and streamline their operations. Email: kaego@khorconsulting.com