Every Entrepreneur needs a basic understanding of small business finance. By small business finance I mean the skills to review, analyze and make decisions based on the financial results of their business. It can be difficult for non-financial business owners to get a handle on the financial side of their business. There are a variety of reasons:
- No formal education in finance
- No interest
- No time
- Not your role
- No business advice on how to do it
The reasons don’t matter. What matters is that finance is a foundational business skill and like any skill you can develop and master it.
What I plan to give you is a simple system that will put you in the driver seat of your business finances. The system has three parts to it:
- Part 1: Collection
- Part 2: Review & Analysis
- Part 3: Planning
Small Business Finance System
The best way to get a handle on your business is to create a business system around it. A business system is just a set of instructions on what to do, when to do it, and how to do it.
If you create a simple business system around the financial operations of your business, you’ll have what you need to:
- Make better decisions
- Make more money
- Maintain control
Step 1 Create a Collection System
Information-Create a List of Reports
A recommended list of basic financial reports includes:
- Balance Sheet
- Profit and Loss Statement
- Cash Flow Statement
- Accounts Receivable Aging
- Accounts Payable Aging
- For manufacturing, an inventory item listing
- For professional service, unbilled time
These reports are available from most small business accounting programs. For example, QuickBooks provides the reports listed above in various formats depending on your preferences. You can see in this partial screen shot, the QuickBooks report center detailing a sample of the financial reports you can run.
Your financial reports give you factual feedback on performance. You’ll make better financial decisions based on reliable facts instead of on assumptions.
I’ve put together a video series explaining how to read these reports, what to look for and what they mean. Understanding your financial results is a critical business skill. Get this simple but effective video series and take your business to the next level!
Timing-Decide How Often To Run The Report
You’re busy running your business so you don’t want to tie yourself up reviewing stacks of financial reports. What is the best practice here? Let me put some perspective on this using the Sears model:
- Good-annual-minimum to be in business
Monthly reporting is the goal. If you are consistently behind on the bookkeeping function, it is difficult or impossible to produce monthly financial reports. In order to stay current, find a bookkeeper familiar with your accounting package. For QuickBooks users, you can find a QuickBooks Pro Advisor here.
If you review financial reports monthly, you’ll spot problems quickly. By finding problems early and fixing them, you can solve profitability problems before they get out of control.
It’s helpful to have a single collection point for your reports. I use a 2 or 3 inch 3-ring binder and monthly tab dividers to keep the financial reports organized and in order. As much as I like to be paperless, a binder keeps the reports in one place for easy reference. This binder can serve another purpose. When you meet with your bank or CPA, just grab the binder and you have everything you need to discuss the results for the current year.
Also, if you have a hard copy of financial reports, any changes made after you’ve printed and reviewed them are easier to spot. This is an important financial control when multiple people access the accounting software.
What is Next?
The next step is to develop a process for review and analysis. Keep an eye out for the next post in this series.
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