While some rare people have been able to simple transition from a hobby into a small business and not worry about money or income, most of us start a business to make money. It all seems simple enough: offer a product or a service, get clients, make money, right? To some degree, yes it is that easy, especially when you are your only employee, but when you start adding employees, offering different salaries or hourly pay, renting or leasing an office space, or adding assets to your company things get much more tricky.
Business Finances, a Brief Overview
The first step to business finances is to get the help of a CPA or hire an in house financial manager, if you are big enough. There is almost no way that you can run your business while managing the finances and do both well. There are a lot of stumbling blocks when it comes to business finances, and some of them can be quite costly.
To create a balance sheet – an immediate view of the money you currently have – you add up all of your assets, both short and long term and add up all of your liabilities and equity. This shows you a snapshot of where your money is right at this moment, but it makes forecasting and planning impossible. Maybe a client just paid for a year’s service, or maybe you just bought new vehicles for the company, and these things make it look like you have much more in terms of assets than in liability and equity, but those things aren’t necessarily liquid.
A more accurate view for the future comes through a Profit and Loss sheet (P&L). This sheet takes account of your total income, less the cost of keeping a client – labor, materials, etc – and shows you your gross profit margin. You then add up your overhead – operating costs, indirect labor (like snack for employees, etc) – and subtract that from your gross margin to get your net profit. Subtract any incentives for your employees and you get your net business profit before taxes.
Keeping careful track of your business’ finances is crucial to turning a profit and staying sustainable into the future. It is not as simple as figuring out your profitability and trying to maximize that. Careful planning, careful tracking, and setting money aside for the future are all important steps in the process of building a business.
What would happen if all of your clients stopped needing your services, or evaporated? 3 months operating cost is the suggested amount of money that you should have saved up in order to keep your business running. But how much does it cost for you to operate? That calculation comes up when you are figuring out your net profit and overall finances.
Working closely with a CPA or an in-house financial manager is a great way to figure out how well your company is doing week by week, pay-period by pay-period, and month by month. It also helps to forecast your future and find out things like when your business will be profitable, or when you need to start looking at pushing sales in order to keep your funnel full. Maybe it is time to hire a business development manager? Your business finances can tell you that.