Many startups and small businesses often struggle with managing the financial side of their business. In this blog post, we give you an introduction to the very basics of small business accounting-specifically, as it relates to costs and financial statements-so you’ll have better chances of running your business successfully right from the start.
What is Financial Accounting in Small Business?
Financial accounting is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. The purpose of financial accounting is to create financial statements that can be used by decision-makers, including owners, managers, creditors, and investors.
Why is Understanding Your Business Financials Important?
As a small business owner, it is essential to have a good understanding of your financials because this allows you to make informed decisions about your business, monitor its progress, and make sure that it remains viable in the long term.
There are several key elements of your financials that you should keep an eye on, including your revenue, expenses, profits, and cash flow. By understanding these basics, you will be better placed to make decisions about how to grow your business and ensure its financial health.
Additionally, if you are seeking external funding from investors or lenders, they will want to see that you have a good understanding of your financials before they commit any money. This shows them that you are a responsible and capable business owner who is able to make sound decisions about the future of your company.
Three Main Financial Statements that You’ll Need for Your Small Business
The three main financial statements of a company are the balance sheet, income statement, and cash flow statement.
- Balance Sheet: The balance sheet reports the company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Income Statement: The income statement reports the company’s revenue and expenses over a period of time.
- Cash Flow Statement: The cash flow statement reports the company’s cash inflow and outflow over a period of time.
In addition, there are also financial ratios.
- Liquidity ratios: These measure a company’s ability to pay its short-term obligations.
- Activity ratios: These measure a company’s efficiency in using its assets.
- Leverage ratios: These measure a company’s debt-to-equity ratio.
- Profitability ratios: These measure a company’s bottom line.
- Market value ratios: These measure a company’s share price relative to earnings, book value, and revenue.
What are the Different Costs of Running a Small Business?
There are a lot of different costs that go into running a small business and a huge part of keeping your company healthy and profitable is knowing how to stay on top of these costs-or hiring a dedicated professional to help you in this crucial area.
- Office space and rent: This is one of the biggest overhead costs for any business. If you’re just starting out, you might be able to get by working from home, but as your business grows, you’ll likely need to invest in commercial office space.
- Employees: Salaries and benefits make up a large chunk of most businesses’ expenses. Hiring and training staff can also be costly, so it’s important to carefully consider your staffing needs before taking the plunge.
- Inventory: If you sell physical products, you’ll need to factor in the cost of inventory. This includes the cost of raw materials, manufacturing, shipping, and warehousing.
- Marketing and advertising: Getting the word out about your business is essential, but it can also be expensive. You’ll need to budget for things like website design, print or online advertising, public relations, and market research.
- Taxes: All businesses are required to pay taxes, including federal income tax, state and local taxes, and payroll taxes. Depending on the type of business you have, you may also be required to pay other taxes, such as sales tax.
- Insurance: Many businesses are required to carry some type of insurance, such as property insurance, liability insurance, or workers’ compensation insurance.
- Licenses and permits: Depending on the type of business you have, you may need to obtain certain licenses or permits in order to operate legally.
- Utilities: Electricity, water, and trash service are just a few of the utilities that most businesses have to pay for.
- Technology: From computers and software to phone systems and internet service, technology is a necessary expense for most businesses today.
- Miscellaneous: There are a million other small costs that can add up, such as office supplies, postage, bank fees, and credit card processing fees.