Unlock Success: 10 Must-Know Concepts for Small Business Owners
Even if you have outsourced your financial functions, as a small business owner, it is crucial to have a solid understanding of key financial concepts to work with your advisor and ‘speak their language”. This article outlines several important concepts that every small business owner should be familiar with.
Understanding Income and Expenses
Key Performance Blog As a small business owner, it’s important to understand how you make and spend money. This will help you maintain fiscal responsibility while promoting business growth.
Profit and Loss (P&L) vs. Cash Flow
In order to make smart short-term financial decisions, business owners should always be aware of the latest cash flow analyses and projections. Keep in mind that an income statement doesn’t tell you if you can pay your bills or how liquid your company is.
Operating Cash Flow
Understanding a company’s operating cash flow is critical to assessing its performance and cash runway.
Gross Sales vs. Net Income
As a small business owner, it’s important to pay attention to both sales and expenses to ensure a healthy and well-managed business. Keep in mind that gross sales do not equal net profits. It’s important to understand every expense, know industry averages, and have enough cash to thrive.
Read a balance sheet
As an owner, it’s important to understand the line items on a balance sheet. By taking a deep dive into the details, you can gain valuable insight into the financial health of your business. You’ll soon know instinctively when something doesn’t look right.
Unit economics
For small business owners, it’s critical to have a clear understanding of the expenses and revenues associated with a specific product or business unit. You need to be able to drill down into your finances. That’s where unit economics comes in. The basic idea is simple: you should know the details of your expenses and revenues for a particular product or business unit. By understanding your unit economics, you’ll have a better understanding of your business as a whole, and it will also help you gain credibility with partners or investors.
Return on equity
This concept helps us decide whether we should continue to invest in the business or look for other investment opportunities. After all, there is an opportunity cost to any investment.
Cost of Goods Sold
It’s really important to have a clear understanding of the costs involved in producing your products or services. If you’re not sure how much it actually costs to make your product or provide your services, it’s hard to know how much you’ll have left to cover your overhead.
Accounts Payable and Accounts Receivable
Effectively managing cash flow with digital accounts payable (AP) and accounts receivable (AR) tools is critical. After all, cash is king for small businesses!
Working Capital
Monitoring working capital is important to ensure the business has enough funds to operate smoothly. If you don’t have enough working capital because of seasonality or other external factors, you can get credit. A working capital ratio between 1.2 and 2 indicates a healthy business to lenders. The working capital ratio is the ratio of assets to liabilities, or how many times a company can pay its current liabilities with its current assets. The working capital ratio calculation is: Working Capital Ratio = Current Assets / Current Liabilities
In conclusion…
A solid understanding of these key financial concepts enables you to make informed decisions, manage your finances effectively, and strategically drive the growth and long-term success of your business.
Financial acumen helps you identify expansion opportunities, mitigate risk, and build a sustainable foundation for your business.
Don’t navigate your finances alone – we’re here to help. Schedule an appointment or give us a call at 832-303-3995.