While running a small business may seem easy on paper, we all know it is usually fraught with challenges and difficulties - at least in the beginning. It always takes a while for a small business to hit its stride, but there are always ways to accelerate the process and maximize efficiency.
Small business owners are often caught up in the finances of their businesses, and for good reason. After all, revenue streams very much determine the long-term and short-term goals of the business, and what its capabilities are. However, quality information comes from looking at the right reports and analyzing correctly.
4 Questions for Small Business Owners
There are four simple questions a small business owner should be able to answer with ease. Knowing this information is like knowing your own name - it should come naturally, and should be correct.
1) How much cash do you have on hand
Simple and direct. Is there enough cash to keep operations afloat, to break even? Are there deficits to be aware of? These are just some of the supplemental questions that may come with this, so it is important to have information handy.
2) What is your break-even number?
This is the make or break number, so again, it should not be difficult to recall. What is the precise amount needed to break even, and are operations on track to hit just that break-even number? The goal is to go past that number, but often in the early stages, it is enough to hit break-even and not go into loss.
3) What is your most profitable product?
The underlying question is what makes your business run? There is some sort of product or service being offered, most likely a combination of products. But it is imperative that there is careful delineations between which offerings are profitable, and which are not when thinking about overall business strategy.
4) Do you have enough cash to cover all your expenses for the year?
This may seem like a scary question, but it is absolutely necessary. Part of owning a business, whether small or large, is forecasting the future. Predictions are important, but these need to be rooted in clear figures and facts. Is there enough cash to cover the year? If not, then careful consideration needs to be given on where revenue streams are being directed.
4 Financial Reports Small Business Owners Should Review
If these questions are difficult to answer, it is time to go hunting and find the right financial reports that will shed light on business operations. There are four core reports that you and your CFO should be review together on a monthly basis at the very least.
1) Income Statement
Also referred to as a profit and loss statement, this report is key for understanding the overall health and sustainability of a business. Rather than turning a blind eye on revenue and hoping for the best, small business owners must always be acutely aware of what the average profit and loss statements look like from month to month.
2) Balance Sheet
This is an integral report for understanding the financial landscape of your small business. The balance sheet will address the assets, liabilities and capital that is available. This is necessary information to have on hand from an operational standpoint, but also if there is interest in scaling the business later.
3) Statement of Cash Flows
Cash flow is also an extremely important financial baseline to have, especially if trying to ascertain the financial health of a business from a day-to-day standpoint. Cash flows, and resource allocation go hand in hand. Without having the right information, it will be impossible to make the right investments for the growth of your small business.
4) Cash Basis Cash Flow Forecast
We affectionately refer to this one an Operating Cash Flow Forecast, but no matter what you call it, it is a report you need. Knowing what the current state of financial viability is important, but being able to look to the future and understand what business needs are is also vital.
Running a small business may seem tricky, especially keeping a handle on finances but with some simple measures in place, it becomes easier over time. Contact us online or call our office today to learn more about how stay on top of finances while running a small business.