Businesses run on money, so the financial aspect of your business determines whether you can pay your staff and your suppliers and whether you earn a profit at the end of the day. Even if you're a craftsperson who is more concerned with making shoes or cakes than evaluating numbers, you'll find yourself with fewer obstacles to pursuing your craft if you get your financials in order.
The financial aspects of a company include building a strong business model, keeping up-to-date books and securing adequate financing.
Your Financial Business Plan
In addition to its text-based company description and marketing plan, a business plan should include financial history and projections based on company activity. Bankers will find these documents invaluable when evaluating your loan worthiness, and the process of creating them will help you to think through potential scenarios.
- Profit and Loss: Your profit and loss statement summarizes your company's financial activity during a period of time, such as a month or a year. It lists all of your revenue at the top and all of your expenditures in the lower section, breaking these into variable expenses, such as materials and production payroll, and fixed costs such as rent. The bottom line of your income statement shows how much you earned or lost during that financial period.
- Balance Sheet: Your balance sheet is an overview of your financial situation at a particular moment in time, showing how much you own and how much you owe. It also shows how these assets and liabilities are distributed and how much of your cash is liquid and easily available for emergencies.
- Pro Forma Cash Flow: This document lays out your financial projections for an upcoming period, specifically showing how much cash you expect to be flowing in and out of your operation during this time. By figuring out when cash will be abundant and when it will be tight, you can develop a plan for saving proactively and also bridging the gaps.
Management Accounting Considerations
In addition to the standard financial statements that you prepare for banks, tax returns and board meetings, financial considerations affect all aspects of a company. By developing systems to track and evaluate data, you can make observations and implement improvements that directly affect your bottom line.
- Tracking Productivity: The more your business can make during its dedicated production hours, the more profitable your operation will be, assuming your sales are strong enough to work through the inventory you're producing. Implement systems for tracking productivity over time, such as recording how many hours are spent on particular tasks and how many units are completed during those hours.
- Monitoring Inventory: Keeping a close eye on inventory can ensure that you have what you need when you need it to avoid costly work interruptions. Inventory management also shows whether you're cycling through stock quickly enough to maintain a healthy cash flow.
- Categorizing Expenses: It's necessary to break down expenditures into general categories such as materials and payroll for the sake of tax reporting. However, if you financially categorize expenses for all aspects of a business, you'll be in an especially advantageous position to assess profitability and make adjustments based on these observations.
Managing Financial Systems
Whether or not you do your own bookkeeping, it's important as a business owner that you have a basic understanding of the financial aspects of your business. Even if you're more concerned with craftsmanship, doing good in the world or just earning enough to sustain other aspects of your life, making friends with business finances will position you to better achieve these goals.
Take an introductory bookkeeping class, have a conversation with your accountant and spend time familiarizing yourself with financial statements. Be scrupulous about tracking money flowing in and out of your business, and build a company culture where employees do their part to maintain your financial systems as well.