Running a small business involves many moving pieces. When it comes to finances, having an organized system for the money coming in and out as well as incorporating assets and liability is key to making financially educated decisions. It tends to be difficult for small businesses to get all the financial information needed in an easily digestible format. Finding options for bookkeeping that give you data in an easy-to-understand format allows businesses to make the next big decision for your small business. When the time comes for the next steps, you’ll know exactly where you stand.
What Does It Mean to Be Financially Educated?
At its core, being financially educated (or financially literate) means understanding the essential workings of money, including income, expenses and the difference between Net Profit and Cash Flow. Becoming financially literate is a long process in which you will continue to learn and expand your financial knowledge throughout your life.
You don’t know what you don’t know. – Socrates
You will find that sometimes being financially educated means being aware of what you do not know but knowing where to go to find the answers.
The Importance Of Accurate Books
Keeping accurate books is key to understanding where your company stands financially. Maintaining accurate and detailed records and reports prevents any surprises from popping up. In many ways, accurate books hold the power to make or break your business. Here are a few of the ways accurate bookkeeping helps your business run smoothly and efficiently:
- Streamlines the process of running your business.
- Find financial inefficiencies and implement cost-saving strategies
- Allows you to make real-time decisions.
- Makes generating financial reports swift and easy.
- Allows for all financial information to exist in a centralized location.
Being a small business owner often requires people to wear many hats. Streamlining and fostering an environment of efficiency is essential to creating a sustainable and thriving workflow. Accurate bookkeeping is key for getting finances in order so you can focus on the bigger picture.
Understanding Your Income Statement
An Income Statement tracks your revenue, cost of goods, operating expenses and is able to tell you your Net Profit or Loss for a certain period of time. Income statements that are broken down into easy-to-read charts and details are incredibly valuable. Quality bookkeeping transforms all the information about income and expenses into beneficial charts and statements so small businesses know exactly where they’re at financially.
The Benefit of a Monthly Review
It is best to start with a high-level review of your finances. This includes key indicators to help you better understand how your company did each month, including:
- Gross Revenue
- Cost of Goods Sold
- Gross Profit
- Operating Expense
- Operating Revenue
- Net Profit
These numbers are specifically chosen as integral figures to show the financial status of your business. Concise reporting is important as it allows you to see the highlights rather than drowning in long statements. In your monthly review, you should look at trends over time. This helps to show the most profitable months and assess what adjustments may be made to increase profits year-round.
The Monthly Review will also show Trend Reports over 12 months. This helps to show the most profitable months and assess what adjustments may be made to increase profits year-round.
Income and Expenses Analysis
Breaking down and analyzing facts and figures around your company’s income, expenses, and accounts receivable can provide valuable insights into what is driving your business forward and holding you back. A good practice is to prompt yourself with questions around these figures, for example:
- Do only a few customers make up a large portion of your revenue? If so, how can we better mitigate risk around one of those customers leaving?
- Is revenue predictable each month or is it inconsistent? What can we do to create more consistency?
- What are your top 5 expenses each month? Is there anything we can do to make those categories more cost-efficient?
The statement is designed to break every dollar coming in and out of the business into a solid Net Profit figure. Net profits help companies to adjust expenses to optimize the amount of money the business makes. It can be difficult to keep track of all the expenses of running a small business and achieve an accurate number for profit. With the income statement, you can put away the calculator as you now have all of the crucial information that you need.
Managing Cash Flow
The overall cash flow of a business is a strong indicator of how well a company is doing financially. Cash flow is vital for growing a business through new opportunities, contracts, investments, and more. With the financial statement, businesses will have their cash flow broken down into the following analysis:
- Change In Cash
- Month End Cash
- How Long Will Your Cash Last?
Having your cash flow under wraps takes some strategy and skills, and to help you along the way here are some tips and tricks for cash flow management:
- Create a Cash Flow Forecast
- Detail out each account, both revenue and expenses.
- Understand and plan for your financial business goals.
- Is financing required? If so, what are the terms and what are the risks involved?
The Takeaway
Making financially educated decisions requires you to get a full idea of the financial health of your small business. Using Pinto Financial helps expedite the relay of information and financial analysis at an affordable price. You’ll get your financial statements monthly in easily digestible figures to understand exactly where your company is at so you can make the best decisions moving forward. To download a Sample Report that is easy to read and understand, click here.