76 Of course you know about business finance!
by Una Hearne.
Ok, so if you want to start your own small business but you think the whole financial side is beyond you… listen up! For the vast majority of you reading this – it is not beyond you. Most small business owners are not natural accountants and don’t like the figures. However, it is essential you understand the figures in your business. You can delegate the work if you can afford it, but you still must understand what is going on with the numbers – ignorance can be bliss but can also lose you your business and your money. So here you are, everything you need to know is in the next four paragraphs.
A business is an entity which produces value and makes money. A successful business makes more money than it costs to run. To make a living from your business it must make enough money to cover:
- The costs of running the business
- Tax
- Your income (Profit after tax)
That’s it, that’s business in a nutshell. It really never gets more complex than that.
Accounting is the discipline of recording all the financial transactions of a business to:
- Show costs, profit and tax.
- Calculate the tax you need to pay
Accounting can be simple or vastly complex depending on the size and type of the business and the information required. Most small one or two person businesses do not need complex systems. A way of recording Money In and Money Out is all you need in terms of bookkeeping. You can do this with a pen and paper or very simple excel sheets. The only other thing you need is a way of keeping and filing all invoices and receipts in and out of the business as this is the proof of what is actually happening and is required to back up your tax calculation.
A Profit and Loss account is one page which shows money in, money out and profit – total amounts for a period of time, like a month or a year. It is a simple document and if you run a business you should definitely be able to read one of these. In fact you should have a projected P&L in your business plan (that’s you guessing how much money you are going to make and how much it will cost to make it).
A Cash Flow is basically money in and money out over time. It shows the flow of money in and out over a period of time and is also essential to understand. It is pointless having a fabulous business theoretically making lots of money if the money isn’t coming in or isn’t coming in, in time to cover the costs. Plenty of businesses have closed because of the cash flow. You need a projected one to start and then to watch how the reality pans out by comparison so you can take corrective action if needs be.
Right that’s it. That’s everything basic you need to know.
Good business is common sense.
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