There are many reasons why some small businesses succeed and some fail. When starting a small business, it’s vital that you have a good understanding of the financial aspects of your business. Making financial literacy a priority will help you start – and build – a profitable and sustainable small business.
Financial literacy topics small business owners should understand.
Every business is a little different, but there are a few financial literacy topics or concepts that are important for every business owner to know and understand in order to successfully run a business.
- Cash flow: Cash flow is just what it sounds like: it’s the flow of money moving in and out of your business every month. If you have more money coming into your business than going out, you have a positive cash flow. If you have more money going out, your business has a negative cash flow. Not having an adequate amount of cash reserves – or a positive cash flow – is one of the top reasons startups don’t succeed.
- Balance sheet: A balance sheet is a summary of the financial balances of a business. The balance sheet is like a snapshot of a business’s financial condition at a certain point in time. A typical balance sheet has two sides – assets and liabilities/expenses. Your business’s balance sheet goes hand in hand with your profit and loss statement.
- Profit and loss statement: A profit and loss statement shows the total revenue, the itemized expenses and the bottom line (how much money your business made or lost) every month. Small business owners must understand how to create a small business budget and how to put together and read a profit and loss statement.
- Equity: Having sufficient equity infused into your business in the startup phase is critical. Equity is related to what your business is worth. For example, if your business is valued at $1 million and you have $600,000 of debt, your business has $400,000 of equity. Having positive equity helps your business become profitable and can support future plans for growth.
- Pricing: Understanding how to price your product or service in order to create a profit is another important aspect of owning a successful small business. To create a profitable pricing structure, you need to project how much your revenue will be and what your expenses will be. Once you determine the price that allows your business to be profitable, the next question to ask is, “Will I attract customers at that price level?”
- Product inventory management: Product inventory is a valuable business asset when managed correctly. If your small business sells a product, you need to track how much inventory you have and know how much it’s worth. If you have too much product on hand, your profit margin will suffer. And if you have too little product, you might not be able meet customer demand.
- Financial advisory team: As you get your small business off the ground, it’s important to create strong partnerships with a commercial banker, CPA, attorney and insurance provider. Look for partners that care about your success but aren’t afraid of sharing an opposing viewpoint and push you to think holistically about important business decisions. By creating strong relationships with people you trust and respect, it will be a lot easier to create positive outcomes in your first couple years of business and beyond.
Financial literacy is the backbone of every small business and can mean the difference between success and failure. Business owners need to be knowledgeable and quick on their feet to make decisions. Take the time to gain the financial knowledge needed to get your business started off on the right foot.
To learn more about how Northwest Bank can provide financial support for your small business, contact one of our commercial bankers today.
