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  • Writer's pictureChristine Callihan

Becoming the Financially Savvy Entrepreneur

Updated: Sep 1, 2019

It started as an idea. With an unlimited amount of your time and care, you’ve grown it into a small business. Surely you can tell that when you are super busy, you must be doing something right! People have complimented you on your efforts. Your determination to see it through has kept you working at all hours of the day and night. So, you are pretty sure things are going well. And hey, the bills are getting paid, you’re able to spend when you want to, so why worry about it now. There are too many other things that need your attention right now anyways.

Imagine going to a baseball game. You get your peanuts and popcorn and find your seats. Players are hitting and running. There is cheering. But no score is kept. Who is winning and who is losing? You’ve seen some runs and it seems like a pretty active game. But you sure wish that they would keep a scoreboard. Isn’t that part of the objective?

Imagine getting in the car and heading northwest with the idea that you will go visit Yellowstone. You see the sun rise in the morning and set in the evening, so you are pretty sure you have an idea of which way to go. After all, you paid attention during Geography class and you know your states, right? As adventurous as that sounds, it’s a little risky.

As a small business owner, I’ll bet you have already heard the statistics. And I don’t want to rain on your parade, but these are worth being aware of. According to the Bureau of Labor, about 20% of small businesses fail in their first year, 30% fail in their second year and 50% fail in their 5th year. Finally, 70% of small business owners fail in their 10th year in business. As a new small business owner, that leaves for an awful lot of uncertainty ahead of you. You have put so much work and time and heart and soul into this creation of yours. And you don’t want anyone scaring you out of your dream. The best thing you can do is to know the facts. Know your numbers and then learn how to use them properly.

Your business may really be doing great. You are feeling like you are starting to reap the rewards of your hard work… and then you get your tax bill and realize that, with more net income comes more tax. Now you wish you had set more money aside for that. Suddenly you find yourself in a real negative cash flow situation and the discouragement and struggle sets in. You have worked hard for what you have built. Put a plan in to place now so that you can be more prepared, and you can navigate your business through those rough spots.

Small businesses rely on financial reporting to make informed decisions and measure overall business health. At the very least, the three reports that are essential for your small business are The Balance Sheet, The Income Statement, and The Cash Flow Statement. To help you go even a step further in your journey to becoming a Financially Savvy Entrepreneur, here are 8 reports below that will keep you at the top of your game.

Balance Sheet

The balance sheet is also known as your statement of financial situation. It is a snapshot of a business’ overall finances. Small businesses need to closely track liabilities and assets.

Liabilities + Owner’s Equity = Assets

Income Statement

Also called the Profit and Loss Statement, or P&L, this report will answer the question, “have we made money or lost money?” over a set period of time. This report shows your revenue, costs, and expenses during any given period of time. The P&L is the best view into your net income, or bottom line. It is also important to note that your business’ net income is what will be used to determine it’s taxable income.

Gross Profit – Total Operating Expenses = Net Profit

(Gross Profit = Sales – Cost Of Goods Sold)

Cash Flow Statement

The cash flow statement specifically looks at how much money is coming into and going out of the business at any given time to understand the effect that daily operations have on the business’s overall financial position. Yes, the Income statement is the one that tells you if you made a profit, but the cash flow statement can tell you whether you have generated or lost cash during a period.

A cash flow statement accounts for operations, investing and financing.

Beginning Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance

Profit Margins

Net profit margin is one of the most important indicators of your business’ financial health. It reveals how much money is left over, after paying for production, to cover operations, expansion, debt repayment and many other business expenses. By tracking increases and decreases in net profit margin, you can measure whether current practices are working and even forecast profits based on revenues.

Net profit margin can vary seasonally, so small businesses should track these trends over time. For example, tracking net profit margin on a quarterly basis can help you manage pricing, expenses, and sales functions.

Accounts Receivable Aging Report

Do you know who currently owes you? Do you know who is past due and for how long they have been past due? You’ll need to keep an eye on the A/R Aging detail report regularly. In fact, poorly managed accounts receivable is the leading cause of cash flow issues for small businesses. It is crucial for companies to identify delinquent accounts and slow-paying customers.

This should be a report that you look at monthly or even weekly. Categorize your AR by length of time overdue.

Accounts Payable – looking at what you owe and who you owe. Accounts Payable is very important and time sensitive because you’ll want to ensure that your bills are paid on time and that you are not overcharged for any service. You’ll want to confirm that your business is making payments to correct vendors and that the business isn't carrying any delinquent open liability accounts.

Budget vs. Actual Report

It is always advisable to keep a budget and to compare actual spending and revenue to your budget and sales projections regularly. You will want to continuously adjust your budget. Understanding places where overspending occurred provides an opportunity for you to either reduce spending or increase the budget in that area. Also, identifying where spending fell short of budgeted amounts helps you identify areas where you can grow… or reallocate.

Labor versus Revenue Comparison or Revenue per Employee

This ratio will tell you how efficiently your business is using its people.

When you know your revenue per employee ratio, you can determine efficiency and use that assessment to make adjustments to operations. High revenue per employee indicates that you have found ways to achieve more sales from each employee. Increased efficiency means lower relative labor costs, improved margins and greater profits.

With the harsh statistics that small business owners face, knowing your financial health and planning your course is critical to your success. You have poured your heart and soul into this venture. Set a strong foundation now.
Become a Financially Savvy Entrepreneur. Begin tracking these numbers from the beginning. With the ebbs and flows of business, you’ll want to keep up with the numbers monthly. This way you’ll be able to track trends and seasons and set your business up with a roadmap to keep you on the path to prosperity.

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