Financial Fundamentals:
It is very rare that business owners get into dealing with the finances of running a business. This is so because entrepeneur is more passionate about the products or services he provides and want to focus his time there. However it is very important to give stress on the financial aspect of the business for its long- term health . You must understand some of the financial fundamentals. It is not necessary to dive deep into these fundamentals, but you must learn some key skills in your business tool kit to measure the financial health and well being of your business .
There are a variety of key indicators of your financial image that you need to be aware of and they can be outlined within the three critical financial statements: Profit/ loss, cash flow and balance sheet.
If you feel you do not have proper controls you could always outsource you recovery audit work to a third party accounts payable profit recovery audit firm
Profits are determined through an equation of revenues. The cost of goods sold is compared to the gross revenue to determine the gross profit. Then you subtract the operating cost expenses to arrive at the Net profit. The equation is the fundamental building block of your profit/ loss statement. Revenues are dollars from generating sales within your business. Cost of goods sold, COGS, reflects the direct costs for labor and materials incurred in your business. Overhead Expenses are all those other costs that you incur so that your business can function (Rent, taxes, Insurance, selling, Accounting etc).
Get Involved in activities that touch cash but are not considered revenues or expenses. You should develop a key indicator for your business that measures the Beginning Cash Balance + cash in flows/ Cash outflows = Ending cash Balance. It will always be necessary to understand the concept of your profit/ loss statement and your cash flow statement.
Concentrate on creating monthly balance sheets. The balance sheet provides information on your corporate Assets, liabilities and Equity. Assets are the prize that you own including Bank accounts , any money your customers owe you , Inventory, property, plant and Equipment. Your obligations to others are the liabilities. Liabilities can include the money you owe your vendors and suppliers , monies due to banks for loans , loans from shareholders etc. The equity balance is the value of your ownership in your business. When you compare the value of the assets less the value of your liabilities, the remainder is your equity.
Financial stableness is an important aspect and you must take it seriously irrespective of the size of your business . Never consider advice coming from the so called wise people that will say that you are too small for creating financial statements. . Always hold yourself accountable to managing your business with wisdom. You can choose to succeed or choose to fail. It is evermore a choice, not a default . So, it is wise to be a financially informed business owner. Your comapany will strive through all the difficulty and benefit from increased profitableness and longevity.