As a new business owner, it’s easy to feel overwhelmed by everything you need to know – and, sometimes, everything you don’t yet know – about your finances. That’s why we congratulate you on making this stop on your journey to financial literacy. We know managing your money may not be fun or easy, but it’s critically important to your business success.
How critical? According to JP Morgan, 75% of small businesses in the United States only have enough cash on hand to operate for 30 days, and one-quarter are just two weeks (or one payroll cycle) away from bankruptcy.
Don’t be intimidated by these grim statistics. Instead, let them motivate you to better understand and control the financial health of your business.
Know your three key financial statements
Business owners have plenty of paperwork to keep track of on a daily, weekly or monthly basis. But you need just three financial statements to see the complete picture of your business’s financial health. Those all-important documents are:
1. Your balance sheet. Here’s where you can see your business assets (what you have), your liabilities (what you owe) and your owner’s equity (what’s left over). Wondering if you have enough cash to cover debt payments, employee wages and quarterly taxes? Your balance sheet will reveal it all.
2. Your income statement. This document shows the total amount of revenue your business brings in and compares it with your operating expenses, production costs and more. The difference between revenue and expenses is your net income.
3. Your cash flow statement. If you’re wondering where all your money went (which, by the way, you should be – always!), your cash flow statement breaks it down for you: operating expenses, investments and all your other financial activities.
When you lie in bed and night dreaming about running a thriving business with countless long-term, repeat, happy customers, you’re actually picturing your permanent business assets.
Permanent (or current) assets are accounts that carry over from one reporting period to the next. That makes them critical to the long- and short-term health of your business. As long as you keep your ratio of current assets to current liabilities (we call that the “working ratio”) higher than one, you’ll do more than just dream about achieving business success – you’ll actually do it!
It's never too late to tackle the basics! Familiarizing yourself with accounting terminology will help you talk about your business, it's current health and long-term goals in a language that prospective backers can understand.