| Business owners rarely go into business to deal | | | | the two concepts of cash and profit are not |
| with the financial aspects of running a business. It's | | | | clearly defined for small business owners; |
| easy to understand why! You are passionate | | | | therefore, you don't have a good handle on your |
| about the products or services you provide and | | | | finances and how to interpret any outcomes from |
| want to focus your time there. The financial | | | | financial reporting. You can show a profit and have |
| aspect usually falls to the bottom of the "desired | | | | a negative cash flow if your loan payments, |
| responsibilities" list. It is critical to the long-term | | | | owner withdrawals, and other non-expense |
| success of your business that you understand | | | | activities are taking more cash out of your |
| some of the Financial Fundamentals of being a | | | | business than you have profit. Same goes for the |
| business owner though. You don't have to be an | | | | opposite flow, you can have a lot of cash coming |
| accountant or financial analyst, but it is important | | | | into the business through an increase in personal |
| that you have some key skills in your business | | | | or lender-financed activities vs. revenues. The |
| toolkit to measure the financial aspects of your | | | | most basic of cash flow statement information |
| business. It's okay to outsource this activity so | | | | can be outlined as Beginning Cash Balance + Cash |
| that someone else can do the work you don't like | | | | Inflows - Cash Outflows = Ending Cash Balance. |
| to do, but make sure you understand the output | | | | It's important for you to understand the concept |
| of the financial information. You'll need it to help | | | | of your Profit/Loss Statement and your Cash |
| you make informed decisions about your business. | | | | Flow Statement. They provide two different |
| Remember! Accounting is not just about taxes. | | | | views of our business.The third financial statement |
| There's so much more to know about the | | | | you should be preparing monthly is the Balance |
| numbers, so you'll know how your business is | | | | Sheet. The Balance Sheet provides information on |
| doing from the management perspective.There | | | | your Assets, Liabilities and Equity. Assets are |
| are a variety of key aspects of your financial | | | | what you own that is of value. Examples include |
| picture that you need to be aware of and they | | | | Bank Accounts, Accounts Receivable, Inventory, |
| can be outlined based upon the three critical | | | | Property, Plant, and Equipment. Liabilities represent |
| financial statements: Profit/Loss, Cash Flow, and | | | | your obligations to others. Examples of liabilities |
| Balance Sheet.I meet with entrepreneurs every | | | | include Accounts Payable, Notes Payable to |
| day that are unsure of their profitability. They | | | | Lenders, Loans from Shareholders, etc. The |
| "think" they are making money because they | | | | Equity balance reflects the value of your |
| have money in their checking account. This is | | | | ownership in our business. When you take the |
| NOT how you should be running your business. | | | | value of the assets less the value of your |
| Having money in your checking account doesn't | | | | liabilities, the remainder is your equity.It doesn't |
| mean you are profitable. It could mean you | | | | matter the size of your business, profitability and |
| haven't paid all the bills so you have a little cash. | | | | ongoing financial stability is something you should |
| Cash and profit are two different concepts. If you | | | | be monitoring on a regular monthly basis. Some |
| aren't profitable, you won't have longevity in your | | | | will say that they are too small for creating |
| business.So what is the difference between profit | | | | financial statements. That is your way of not |
| and cash? Profits are determined through an | | | | holding yourself accountable to managing your |
| equation of Revenues - Cost of Goods Sold = | | | | business wisely. It'll always be someone else's fault |
| Gross Profit - Overhead Expenses = Net Profit. | | | | when your business fails...or at least that is what |
| This equation is the makeup of your Profit/Loss | | | | you'll say. Though it won't be the truth, it'll be your |
| Statement. Revenues are dollars from generating | | | | fault for not managing your business wisely. You |
| sales within your business. Cost of Goods Sold | | | | can choose to succeed, or to choose to fail. It is |
| reflects the direct costs for labor and materials | | | | always a choice, not a default. So make the |
| incurred in your business. Overhead Expenses are | | | | choice to be a financially informed business owner. |
| all those other costs that you incur so that your | | | | Your business will thank you through increased |
| business can function (i.e. Rent, Taxes, Insurance, | | | | profitability and longevity!Contact: Pam is the |
| Marketing, Accounting, etc.)You can have activities | | | | author of Out of the Red, a book that covers |
| that affect cash but are not considered revenues | | | | various important aspects of management |
| or expenses. For example, when you borrow | | | | accounting for small business owners. Topics |
| money from a lender, it is not considered income. | | | | include Break-Even Point, Cash vs. Profit, |
| It is classified as an increase in your liabilities (i.e. | | | | Budgeting, and more. To order your copy, call |
| debt). When you repay that loan, it will not be | | | | 816.304.4398.For more information, you can visit |
| considered an expense. It is a reduction in your | | | | the website at Newman is a Certified |
| liability. Any interest you might incur on that loan | | | | Management Accountant, Author, and Certified |
| would be classified as interest expense, but the | | | | QuickBooks(R) ProAdvisor for Financial and |
| principal portion is not. Similar concept applies for | | | | Point-of-Sale software. |
| owner investments and withdrawals.Often times | | | | |