Small Business Finance Basics: A Guide For New Business Owners
Updated September 19, 2022
Whether you are about to start your own business or have been running one for a little while, it’s very important that you know your numbers. If you don’t know how much your labor costs are or how much it costs to produce the goods you sell, you won’t be able to know whether or not your business is profitable.
The good news is that it doesn’t take long to wrap your head around the basics of small business finance. Here’s a quick cheat sheet…
How Do You Determine Your Operating Costs?
Your operating costs are broken down between fixed costs and variable costs. Fixed costs are those that stay the same each month such as building rent or workers compensation insurance payments. Variable costs may include labor costs, electric bills, and others that you have some control over each month.
To determine your operating costs, gather any bill or statement that you have from a vendor or creditor. From there, all you need to do is add each payment until you reach your final total. Once you determine how much you spend on operating costs each month, you can look for ways to reduce or even eliminate them.
Take Advantage of Today’s Technology in Managing Business
Instead of going full-bore with an accountant or heavy-duty software, there are a number of “third path” options that rely on easy-to-use technology. Companies like BodeTree have simplified the entire process by connecting directly to bank and credit card accounts—providing real-time insights into business financials like cash flow and valuation. There are other solutions as well, such as InDinero and Bench, which add a human element to the process by connecting you with a virtual personal bookkeeper.
How Do Your Determine Your Monthly Revenue?
To find out how much your company makes each month, look at all the checks or online payments that you have received each month from your customers. To make it easier to keep track of operating revenue, you may want to install a point-of-sale (POS) system that keeps a running tally of each dollar brought in. Revenue may also be derived from the sale of assets or land that the company owns.
Financial Value Represents Big Picture of Your Business
Every entrepreneur is looking to maximize value. While the definition of value can differ from person to person, more often than not it’s the financial value of the business that entrepreneurs really care about. Financial value represents the culmination of everything that is going on in a business: where it has been in the past, where it stands today, and where it’s going in the future. Keeping an eye on the big picture of your business can help you stay motivated and engaged in managing your finances.
How Do Small Businesses Get Loans?
Small businesses need capital to operate just like any other company, and many turn to alternative lenders for short-term funding. Small companies may pursue non-traditional funding methods like invoice factoring to liquidate their accounts payable and get their money faster. They may also consider hard money lenders or others that may use assets such as land or equipment as collateral.
If a company has been in business for at least a year, it may be eligible for a unsecured loan from a traditional bank. However, most large banks will only lend to companies with significant and steady revenue. Companies that accept credit cards may be able to get merchant cash advances, in which companies sell a portion of their future receivables (i.e., their anticipated credit card revenue) to secure funding.
Where Can Small Businesses Turn for Help?
Small business owners who are struggling to understand their financial situation may wish to talk with an accountant. In addition to learning more about basic terms and concepts, accountants may be able to identify ways that a company can save money or increase its potential for future growth. You may also want to talk with other business owners to get their insights about the financial side of running a company.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, where you can get personal checks and business checks.