When starting a business, entrepreneurs sometimes neglect to give focus to or it never crosses their minds how important it is to keep accounting records. Many times, it is not until circumstances arise that require records to be presented for audit or to potential business partners or investors, or a huge tax debt at the end of the year.
We know that starting a business can be a tremendous strain on your finances; as well as that it takes time before your new venture will start to turn a profit to help you make a decent salary and/or support your family. So, it is so important to make sure that you have a great understanding of finances and that you take the time to get those finances in order. It will be important to decide if expenses that your business incurs are essential costs. These would be operating costs and those essential items necessary to keep your business running. It is important to note that running out of money is the number one reason why entrepreneurs run back to looking for a job and why small business owners go out of business.
To get started, entrepreneurs should create an operating budget, very similar to a personal budget - Click here to Tweet. This should include any income from programs, services, book sells, products, etc., and all expenses should be listed in terms of fixed and variable costs.
Secondly, understanding financial statements and looking at these numbers on a regular, consistent basis are key to your success as an entrepreneur and understanding the financial health of your business. The three statements you want to be sure to look at is the Income Statement, Balance Sheet, and Cash Flow Statement.
The Income Statement, which sometimes is referred to a profit and loss statement, shows the revenue and expenses over a given period of time (i.e. all of January, all of a specific year, etc.); be careful to not only look at this statement because it does not show you cash flow. The income statement is important because it shows the profitability of a company.
The Balance Sheet is a snapshot of your business at a given point in time; this changes day to day because it depends on what’s happening in your business. The balance sheet allows someone (i.e. like a creditor, investor, or potential business partner) to see what a company owns as well as what it owes to other parties.
The Cash Flow statement is KING; it gives you the best indicator of how much money is moving in and out of your business. The cash flow statement organizes and reports the cash generated and used in operations, investments, and financing activities. If you are not familiar with these statements for your business, it is highly recommended that you spend some time learning about them and reviewing them at least monthly.
Other costs you want to be aware of are your training and development expenses, as entrepreneurs we should always be learning and increasing our knowledge, web design costs, graphic design costs, printing costs (a huge costs that often gets overlooked), travel if you are doing business in multi-states or globally and need to meet clients in-person, and a business coach who can help guide you on your entrepreneurial journey.
“Many times, entrepreneurs don’t spend enough time counting up the costs and understanding what it takes to run a business and become overwhelmed and/or frustrated when things don’t seem to work out or there never seems to be enough money. ” Don’t let this be your story.
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