In this episode, James and Megan are starting a new theme on Finances, covering the fundamentals to help set you up for success.
Today’s Kryptonite: Business Financial Literacy!
Why care about finances?:
- First of all, we need to recognize that many people struggle with financial literacy from a personal standpoint. When you add the complexities of business finances, it can get very confusing (even for the best of us).
- When looking at business finances, it’s not just about Revenue. You can have sales of a million dollars; but if your expenses are two million, you will be out of business in no time. When it comes to business, Cash Flow is King!
- Mismanagement of finances can quickly take down your business. Many struggle with this and end up out of business or worse – bankrupt. We need to keep our heads about us and make wise decisions.
- Finally, the other BIG reason we need to be financially savvy with our businesses is because the IRS is going to dig into your business finances. As a business owner, you are responsible for all your taxes and justifying all your revenue and expenses. You do NOT want to mess this up.
What are the key fundamentals?:
- First and foremost, keep your personal and business finances separate! Mixing the two shows a lack of professionalism and can lead to big problems if you ever get audited.
- When running a business, you cannot just run it from a checkbook or your online banking. If this really is a business and not just a hobby, you need to use the right software. QuickBooks is a great product and pretty much the standard. All accounting firms accept and can work with QuickBook files.
- Revenue is the money your business brings in. You must account for every dollar you earn. You have to make sure you’re charging enough so you have healthy profit margins. You need to make a profit so you can continue to stay in business.
- After Revenue, you need to understand and budget for your Expenses and Taxes. Your expenses will include your Cost of Goods Sold (COGS) and your Selling, General & Administrative expenses (SG&A). Your Cost of Goods Sold are typically the costs associated with the product or service you are providing. The Selling, General, & Administrative expenses are most of your overhead expenses. These can get out of hand easily for any business and you need to keep a tight reign on them.
- Taxes: You need to pay them. You can minimize them, but you do not want to mess with taxing authorities.
- Finally, you need to have Retained Earnings. This is your profit. These monies can be your emergency fund for slow periods in your business, your seed money for new products or offerings, or funds to grow your business by adding to your team.
How can we keep our businesses financially strong?:
- Remember that Cash Flow is King! Make sure your have sufficient revenue coming in and keep your expenses under control.
- Keep your books current. Don’t wait until the end of the year and then try to use your bank statements to update QuickBooks. If you really hate this task, outsource it to a bookkeeper.
- Hire the best CPA you can afford. They should be an advisor to you and not just a number cruncher.
- Learn how to run and read these three key financial statements: Income Sheet, Balance Sheet, and a Profit & Loss Statement
- Update your books and reconcile your accounts. Make sure everything is current.
- If you don’t have a program to track your finances, set one up and take a class if necessary.
- Run your financial reports so you know where you currently stand. As this show is released, that means run your reports for 2014 if you were in business for that year. If you’re listening to us later, run your reports for your current year to date.
Note: We are not accountants or tax attorneys, so please seek their advice on specific situations you may be facing.