As business owners that live in the age of information, it’s easy to train and self-educate yourself in areas that you are unfamiliar with. However, if you are a solo founder, this would also require you to wear multiple hats as you alternate between different tasks.
While learning the day to day responsibilities that come with running a business is a no-brainer, one area that you can need to be especially savvy in is your finances. Learning the basics of finance can help you make the best use of your capital while ensuring you don’t rack up debt that you can’t repay.
If you are a small business owner, here are five financial fundamentals you need to know.
Your biggest expense when running a small business is the operating costs, hence, it is important to keep a tab on them from day one. Your operating costs can be broken down into two main categories: fixed and variable.
Fixed costs, as the name suggests, remain the same each month. This includes building rent, workers’ compensation and insurance. These expenses are non-negotiable so you need to make sure that they are covered each month. Variable costs, on the other hand, are costs that you can control like utility bills and payroll.
As a small-business owner, it is important to assess your expenses each month because this can help identify any recurring or unnecessary expenses that you can cut back on. Many business owners also find it useful to maintain a separate bank account for their operating expenses.
2. Revenue & Profit
Next up is taking account of the money you make each month. The amount you earn from the total sales of goods and services is referred to as revenue. This value can be calculated by adding up all the checks, online and cash payments you have received during the month. The sale of any assets in the business is also included in this amount.
When you subtract your gross expenses from your revenue, this gives you the total profit for the month. While small businesses often breakeven in the first few years of operation, it is important to set profit goals each month as you begin to grow and earn more revenue.
For businesses that sell physical goods, inventory refers to the completed product that is ready for sale. At the early stages of your business, it can be easy to get caught up in the excitement of selling your goods but it is also important to consider the costs that are tied up into holding this inventory.
Keeping track of your inventory can seem like a tedious task but it is an essential part of running a small business. Having this information can help you put a price on your production costs so you know how much to add as a profit mark-up. Additionally, keeping a tab on your selling times and stock numbers through the year can help you order stock when necessary. This will ensure that you are not holding redundant inventory which will only tie up more cash in the business.
4. Debtors and Creditors
When growing your small business from the ground up, debt can be a good thing as it can help you cover your expenses in the short run. However, there is a difference between debt that you can pay off and debts that can get out of control. But it is equally important to stay on top of payments that are owed to you.
As a small business owner, you need to remain complacent on the money you need to pay off and the amount that is owed to you AKA debtors and creditors. Good financial management is all about the little things. Even one late payment or a delay in money owed to you can impact your finances. Debt financing is just one way to fund your business, there are various alternative financing methods available as well.
5. Prep your taxes
If you keep a good record of your income, expenses, assets and liabilities, preparing your taxes should be a piece of cake. But this does not mean that you can put off your taxes to a later date. Unlike expenses, taxes are something that need to be paid eventually and filing your returns on time can help you avoid any penalty payments in the future.
If you are not familiar with the tax filing process, online resources like TurboTax can help you prepare your tax returns and file on time. Brand new business owners should consider setting aside a portion of their income for the annual tax payment.
Knowing your financial basics before you embark on your business venture can help you make sound money decisions in the future. As your business expands, you can even enlist the help of an accountant to understand your financial situation better. Talking to small-business owners who are in the same boat as you can also provide some valuable insights.