Understanding your financials is key to operating a healthy and profitable business. As a business advisor at the Maine SBDC at CEI, I help small business owners get a better understanding of their financials so that they can make good decisions about the future of their business. Below are 5 common questions I get from the entrepreneurs and small businesses:
What do I need to track and what is the best way to do it? All transactions in your business should be recorded in an orderly, systematic way. All money coming in and going out will end up on either the Balance Sheet or the Profit & Loss Statement. You can use a manual system or a computerized system such as QuickBooks. It’s your choice as long as you are recording everything in a way you can get useful information out of your system.
Why do financial statements matter? The Balance Sheet and Profit & Loss Statement together give you a pretty clear picture of your operations and the health of your business. They are tools for making management decisions about your business and are sometimes required by people outside your business, such as lenders or investors.
Balance Sheet – What is it? The balance sheet shows you your asset (what you own), your liabilities (what you owe) and your equity (the difference between assets and liabilities). It also shows you where you spent your profits. The Balance Sheet is a snapshot of your business on a specific date.
Profit & Loss Statement – What is it? The Profit & Loss Statement is like a video of your business. It shows how you are doing over a period of time. It captures your sales and expenses over time, usually a month or a year, and how much profit you have.
Why doesn’t profit equal cash? This is a very common question and one that the Balance Sheet and Profit & Loss Statements will help answer. Sales minus all expenses is profit, or loss if expenses are more than sales. Profit is what you have available to make loan payments, purchase assets such as equipment or take an owner’s draw (money you take out of the business for personal expenses).