Hello everyone and welcome to today’s video. Today I’m going to be talking about why it is important for you to get familiar with your business finances. I know that for a lot of small businesses that people work and their accounting and their bookkeeping is one of the areas that we all like to set aside and let somebody else worry about it. But it is actually important for you to get familiar with how business finances work.
Typically, this one happens, a lot of us just collect receipts, statements and everything; put them in a shoebox; and at the end of the year we hand it over to the bookkeeper or the accountant to sort it out. Especially for some of us, we wait until tax time for the accountant to tell us how the business did the previous year. If you’re one of those people, you’re really doing it backwards. To wait until tax time to be told how your business did is actually a recipe for disaster. What happens is that if there was a big dislocation of a big problem that happened financially during the year, you waited too long to find out and you wouldn’t have given yourself enough time to react to it. That’s why some people realize when it’s too late that they’ve run out of money and it’s because they haven’t been paying attention inconsistently to how the business finances work.
There are three statements that you need to pay attention to when it comes to business accounting:
- Income statement (profit and loss statement)
This tells you, with your revenue and your gross profit after you take out all your expenses, whether it’s a profit or a loss.
- Statement of cash flow
This monitors the movements of cash within that particular month. You get to see where your cash came in and where it’s going, so that you have a good sense of what is left at the end of the month.
- Balance sheet
This tells you your assets, starters of your assets, your liabilities, and the equity you have in the business.
These three all work together to give you a picture and a good picture of how your business is doing financially.
It’s important to be familiar with all these three. But if I was asked to pick one of the three, I would pick the income statement which is the profit and loss statement. The reason for that is that the income statement gets you a good snapshot of where you are. How much money is coming in after you take out direct expenses? How much gross profit you have? Then out of that gross profit, the expenses that you have for the business, you have to take that out and then it immediately tells you whether you have a net profit or a net loss.
I encourage you to get familiar with that and get your accountant or your bookkeeper to sit you down and explain to you how the income statement works, so that you understand how you are making money as a company and in gift card rescue. Even though we have a bookkeeper and even though we have a CFO, I also have my own income statement, my financial statement on excel. That allows me to play around with the numbers, do my own forecasting, and be able to see how the numbers move together. If I increase this, how does this impact my bottom line? If I decrease this, how does it impact? If I save money in this section, what happens to the overall picture? It allows you to see which cost is flexible, which cost is fixed, which cost is sensitive in growth and revenue, and which are not. It is important to see all these things because as an entrepreneur, this will help you manage your business better.
Again, the main point I want to make in this video is that you need to get familiar with how your business finances work. If I were to pick one of them, I think you should learn how the income statement works and you should also set up one yourself and play around with it. It will be a good exercise for you and it will get you a good understanding of your business.
That’s it for today, thank you for watching the video and subscribe to our channel for more videos to come.