Small Business Finance Management & Basics

To run a successful small business, you have to have a handle on your finances, even if you work with an accountant or another financial professional. Here are key financial terms and documents every small business owner should understand.

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Gross Revenue

Gross revenue is the total amount of sales for a reporting period, prior to any deductions.

To calculate gross revenue for a product, multiply the items sold by the price of the item. To find gross revenue of a company that sells a variety of products, repeat that step for each product.

Gross revenue indicates the ability of a business to sell goods and services, but not its ability to generate a profit. Sales discounts and sales returns are deducted from gross revenue.

Expenses

According to the Small Business Administration, business expenses are the cost of conducting a trade or business. These expenses are usually tax deductible if your business is for-profit. Rent, business travel and paying employees are all deductible business expenses. For a list of deductible expenses allowed when filing taxes, visit the IRS website: Deducting Business Expenses

Net Profit

Net profit is the profit of a company after operating expenses and all other charges including taxes, interest and depreciation have been deducted from total revenue. Net profit is also called net earnings or net income.

The Investing Answers website has a net profit calculation example:

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Cash Flow

Cash flow is the money moving (flowing) in and out of your business monthly. Cash flows in from customers or clients buying your products or services. Cash flows out to cover expenses.

Lack of healthy cash flow into your business will shut you down faster than anything else. As a matter of fact, 82% percent of businesses fail due to poor cash flow management skills/poor understanding of cash flow.

The SBA has a helpful template to help you calculate cash flow here: A Simple Cash Flow Spreadsheet Anybody Can Use. For more information, visit this SmartBiz University module: Analyzing Cash Flow

Balance Sheet

A balance sheet is a snapshot of the financial condition of a business at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities and owners' equity.

Visit the QuickBooks blog for in-depth information: The Business Owner’s Guide to Balance Sheets (and a Free Template)

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Income Statement

An income statement is also called a profit and loss (P&L) statement. Investopedia gives an easy-to-understand outline here:

An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a specific time period. To help prepare this important document, review this post from the SmartBiz blog: How to Prepare an Income Statement

Cash Flow Statement

The cash flow statement measures how a business generates cash to pay its debts and fund operating expenses. In short, it shows how a company's operations are running, where its money is coming from, and how money is being spent. A business owner can use their cash flow statement to predict future cash flow to help with budgeting.

Revenue Forecast

A revenue forecast is a prediction for the upcoming year about how much money your business will likely bring in from the sale of your goods or services. It’s important so you can estimate the expenses you can afford and your profit margin. AccountingDepartment.com has an easy-to-digest article: 3 Ways to Forecast Your Revenue

Entrepreneur recommends two ways to look at revenue forecasting: An optimistic approach and a more conservative estimate.

Want a deeper dive into financial terminology important for a small business? Check out our Glossary of Terms for Small Business Owners.

What You Need for Tax Time

It’s no surprise – small business owners are responsible for paying taxes on all income generated by their business. Even if your business didn’t generate income during the year, you have to report that to the IRS as well.

The documents you need to produce to file your business taxes depend on the structure of your business. H&R Block has a helpful list here: Small Business Tax Prep Check List

If you’re not sure whether to do your own taxes, take a look at this post to hear from real small business owners: Small Business Taxes: Self-File or Use a Professional? Time, cost and complexity are all elements you should consider when deciding to DIY or not.

The Bottom Line

Getting a handle on your finances should be the first order of business for an entrepreneur. The SmartBiz Blog has a handy article with steps you can take to keep your business financially healthy: 6 Financial Habits of Successful Small Business Owners

Having your finances in order is especially important if you’re seeking low-cost funding to grow your business. SmartBiz Advisor is an educational (and free) tool created specifically for small business owners to assess the health of their business before applying for funding.

The stronger your company is financially, the more likely you’ll be to get funds with low rates and long terms to help you save money and grow your business.

“Think of this advisor as an Intelligent CFO,” says Evan Singer, SmartBiz CEO. “It’s the world’s first intelligent CFO advisor that uses Artificial Intelligence and Machine Learning to help our customers.”

Getting started is simple. Create an online sign-in & password here. To see where you stand in the key areas and receive advice, answer a few questions and upload your most recent business tax return. SmartBiz Advisor then generates your Loan Ready Score in seconds.

Singer adds, “Just as financially savvy consumers regularly check their personal credit scores, savvy small business owners should regularly check their SmartBiz Advisor dashboard to mark their progress against financial goals and use those insights to make better business decisions.”

 

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