Not sure where to start with your business finances? Here’s what you absolutely need to know.
For must of us, dealing with the financial side of business ownership is about as fun as cleaning the litter box — but just as necessary.
Women are starting businesses at a higher rate than ever, and it’s important for all of us to have a strong grasp on our business finances from Day One.
It can seem like there are a million things to learn, but for now, let’s focus on what you need to know to get a handle on your business finances, right now:
#1 Know Your Operating Expenses
If you don’t know your basic operating expenses, you’ll never have a clear picture of your financial situation — and that makes it just about impossible to build a sustainable business.
Feeling overwhelmed? Start by figuring out your cost-per-unit on your main service offerings. How much does it really cost you to provide your most popular goods or services? What materials do you absolutely need to have on-hand?
Out-of-pocket expenses like you web hosting, physical materials, and even the coffee you buy for a client all count toward your costs.
And don’t forget to factor in the time you spend working. Your time is just as valuable as the money you spend for materials.
(Need help tracking your time? Maybe Toggl is the tool you’ve been waiting for!)
#2 Think About Your Reports… and What They Mean
Let’s talk about the two most important reports a small-biz owner needs to familiarize herself with: your profit-and-loss statement and your balance sheet.
A P&L statement and a balance sheet might use similar data, but the insights they give you will be different. Before you can use each report to your advantage, you have to understand the unique things that they can do for you.
Your Profit & Loss (P&L) statement is there to give you a hard-and-fast verdict on whether your business is actually bringing in a profit.
Your balance sheet will use many of the same numbers, but its purpose is to give you the exact dollar amounts of your company’s assets and liabilities.
#3 Know Your Burn Rate
Okay, so now that you’ve got a handle on your cost-per-unit and the current financial state of your business, let’s talk about the worst-case scenario…
What happens during those weeks (or months) when you’re not making any money at all?
This is your burn rate: the rate at which your business spends money with or without producing income.
It’s a sobering thought, but slow times are inevitable. It’s important to be prepared. How much does it cost for your business to simply exist? If the number seems high, you should have enough information by now to consider what you costs you might be able to reduce or cut entirely.
#4 Be Sure You Have Savings
How much money do you have in savings for your business, right now?
Ideally, your business should have 6 months of operating costs stashed away. And if you’ve got that on-hand, then that’s awesome!
But let’s be real: many of us just aren’t there yet. Instead of beating ourselves up about it, let’s make a smaller goal of putting away just a little bit of our business income whenever possible, bearing in mind that our ultimate goal is to have some money in reserve (whether it’s 1 month or 6 months of income).
(By the way, your personal savings don’t count toward this amount. Trust us, it’s worth it to take the time to start a separate savings account just for your business. It’ll save you plenty of accounting headaches in the future.)
Even if you love math, tackling business finance can be intimidating. While you can accomplish a lot yourself, a great accountant can do wonders for your financial outlook. In the following weeks, we’ll discuss what to look for in a your ideal small-business accountant.
But for now, go you! If you’ve followed our advice, you’re off to a running a start!
How about it, LEAP colleagues? Do you have any business finance tips that have made your lives easier?
About Feliza David, Creative Director
Think of Feliza as LEAP’s very own Don Draper, except without the hard partying. (The only thing she binges on is Netflix.) From tool reviews to learning modules to eye-catching graphics, Feliza probably had her hand in it.
She loves LEAP because:
Feliza lives in Indiana with her husband, two dogs, one cat, and the occasional goldfish. When she’s not writing, drawing, or reading, she’s probably sleeping.