Launching a small company can be exhilarating, like entering an extreme sports competition with huge risks and prodigious rewards. But keeping a business profitable year after year may not always generate such exuberance, especially if you’re the one responsible for balancing priorities and covering day-to-day expenses.
Like it or not, monitoring such mundane matters as cash flow, inventory, collections, and taxes often distinguishes winners from losers in the business arena. Conscientious owners who keep a close eye on their financial resources may still be in the fight five years after opening their doors. Entrepreneurs who neglect their accounts may find themselves posting “going out of business” placards after a year or two of frustration and dashed dreams. Unfortunately, some owners never discover what went wrong.
Even if you’ve hired a top-notch accountant or bookkeeper, it’s wise to acquire at least a basic understanding of the following business fundamentals:
- Cash flow. Liquidity is the lifeblood of your business. Like a doctor assessing the health of a patient, gaining insight into cash — how much money is in the bank, how much is coming in, how much is going out, where the cash is being spent — can help you reach a proper diagnosis. Even if the firm seems healthy, knowing where your cash is flowing can inform crucial decisions, prompting adjustments that may stave off disaster before it strikes.
- Assets and liabilities. The listing of balance sheet accounts lets you know how much is tied up in inventory, how much you owe and how much is owed to you, how much equity you’ve contributed to the business, and other factors that may affect your company’s health. For example, a balance sheet that’s heavy in accounts receivable may indicate a problem with too-lenient credit policies. A large cash balance may signal missed investment opportunities or sluggish payment of outstanding loans.
- Business versus personal accounts. Of course, if the line between the company’s books and your personal finances becomes blurred, your diagnosis may become distorted. Keeping personal and business budgets separate makes it easier to manage taxes and track financial transactions. Setting up discrete bank accounts — including a separate payroll account for employee social security, income taxes, and Medicare — is also crucial.