Running a business requires gaining expertise in many things over a short period—especially financial matters. If finances do not come naturally to you, you may quickly feel like you are in over your head. Fortunately, mastering these skills might be easier than it seems. Here are four key financial skills that all business owners need to learn.
Reading Financial Statements
Being able to read and understand your business's financial statements is the only way to truly have a handle on your business's overall financial health. These statements include:
- A balance sheet that measures your assets, liabilities, and equity.
- An income statement or profit-and-loss statement, which shows your business's income, expenses, and profits.
- A cash flow statement, which reports all cash received and spent over a specific period.
Your balance sheet may help demonstrate your business's financial health to lenders or forecast future revenue and expenses. Your income statement helps assess your ability to earn profits. And your cash flow statement determines whether you are able to maintain payroll and pay the bills and expenses that come from operating a business.
Budgeting Income and Expenses
How and when you spend business funds may directly impact your profitability, cash flow, and ability to expand. By setting spending limits and income goals, you may plan for future expenses and create savings to help you weather a down period. To make a budget, you need to know what you are spending. Tracking software may help you categorize and prioritize expenses to see what you might cut, what you might outsource, and what should rise to the top of the list.
Collecting Outstanding Balances
No matter how busy and popular your business is, it may fail if you cannot collect prompt payments for your services and products. You need a comprehensive invoicing strategy to timely recover payments, track and pursue late payments and send automatic reminders. Creating a website that allows customers to pay online may also help increase your collection rate.
Working on Your Business Credit
Nearly all businesses require some credit to expand, hire new employees, pursue new opportunities, and upgrade or maintain fixtures and facilities. Poor or nonexistent business credit may require you to dip into your pocket to fund your business, creating a financial strain and complicating your income taxes.
You may monitor your business credit score by accessing credit reports from reporting bureaus like Dun & Bradstreet. Check your business credit reports periodically to ensure that they contain accurate and up-to-date information. If you notice a dramatic dip in your credit score, look through your business's financial documents to see what has changed.
You may also consider incorporating your business into a C-Corp, an S-Corp, or forming an LLC. These business structures help separate the company from your personal finances, limit your liability, might provide tax benefits, and may help boost your business credit.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual or business owner.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This article was prepared by WriterAccess.
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