What a small business owner needs to know about finance
Updated: Feb 4
If you're like most small business owners, you get really confused when you start thinking about financial issues. You probably understand some basics about profit, cost management, and managing your monthly budget, but the ins and outs of small business finance may seem like a maze.
While there are definitely areas of finance that are complicated, there are certain basics that aren't too hard, and every small business owner should know.
What is finance anyway?
Well, to put it simply, finance deals mostly with the flow of cash through your business. Where does it come from, what is it used for, where does it go after you've spent it? These are the key questions finance seeks to answer. To this end, financial experts have devised a bunch of ways to understand and answer these questions, as well as ways to manage certain common problems.
Understanding your documents
One of the quickest and simplest ways to start getting a grip on your business' finances is by learning the basics of the three key financial documents every business usually produces (publicly-traded companies are required to produced them) on a monthly, quarterly or annual basis: Profit and Loss statement (P&L), Balance Sheet, and Statement of Cash Flows. Now, we've already discussed each of these documents in depth elsewhere, but here's a quick primer:
Profit and Loss totals up all your revenue during a certain period and then subtracts your costs to find your Net Profit.
Balance Sheet totals up all your assets and balances them against your liabilities to determine how much equity the owners of the company have left over.
Cash Flow Analysis takes your starting cash position, adds incoming revenue during a period, and then subtracts the cash that left your organization to find how much cash you have left over.
Cash is king
In the end, nothing matters more to your business than cash, and all these documents are really just different ways of looking at the same thing: how is cash moving through your business? Is it getting stopped somewhere? Is it flowing into unproductive places? Is there not enough of it to go around? These are all the questions these documents are designed to answer, and they're the questions a small business owner should have the best handle on. This makes understanding your financial documents (at least at a 10,000 ft level) very important to understanding the health of your business.
If you'd like to learn more about how to read financial statements and gain key insights from them, download our free eBook "Business Finance is Hard...but it doesn't have to be."