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:
- 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).
- 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.
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