The Financial Concepts Every Business Owner Should Understand
Every business owner should understand the basics of financial management, doing so will helps you make sound decisions about your business & keep your finances on track. Below are five key financial concepts that you should know:
1 - Operating Cash Flow
Operating cash flow is the money that flows in and out of your business from day-to-day operations. This includes revenue from sales, payments to suppliers, & employee salaries. It’s important to track your operating cash flow to see how much money your business is bringing in and where it’s being spent.
2 - Gross, Operating and Net Profit
Gross profit is the money your business makes after you subtract the cost of goods sold (COGS) from revenue. Operating profit is gross profit minus operating expenses, which are costs associated with running your business (e.g., rent, utilities, etc). Net profit is operating profit minus taxes and interest. Knowing your gross, operating, & net profit will give you a clear picture of your business’ profitability.
3 - Accounts Receivable
Accounts receivable (or Debtors) are the amounts of money owed to your business by customers who have not yet paid. It’s important to keep track of your debtors and follow up with customers who are late in paying.
4 - How to Read a Balance Sheet
A balance sheet is a financial statement that shows your business’ assets, liabilities and equity at a point in time.
It’s important to understand how to read it, so you can see where your business’ money is coming from and where it’s going.
There are three main components:
– Assets: this includes things like cash, inventory, and equipment.
– Liabilities: money you owe, including loans & accounts payable.
– Equity: is essentially the money that shareholders & investors would receive if your businessโ assets were liquidated & all liabilities were paid off.
By understanding your balance sheet, you can get a better picture of your business’ overall financial health and make informed decisions.
5 - Cash vs Accrual Accounting
There are two main ways of accounting for business transactions: cash basis and accrual basis.
With cash basis accounting, you only record transactions when money changes hands. This is the simplest way to track your finances, but it is difficult to get an accurate picture of your business’ financial health.
Accrual basis accounting records transactions when they occur, regardless of when money changes hands. This method is more complex, but it provides a more accurate picture of your business’ financial situation.
You need to understand the method of accounting you use so you can track your finances.
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All business owners should understand these five financial concepts in order to make informed decisions about their businesses’ futures, the saying is: knowledge is power.
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