The Basics: Start to Understand Your Business Finances

Think and Grow Rich. The Automatic Millionaire. The Simple Path to Wealth . . .

Do a simple search on Amazon (or your preferred bookstore provider). You’ll quickly become inundated with a litany of options for building personal wealth and myths of the small business owner.

But try the same search for developing financial confidence in business or reading financial statements, and you’ll turn up much fewer results. 

Here’s why that’s a problem:

For us entrepreneurs, personal financial stability STARTS with the stability of our business. 

And gaining financial security by managing your business finances is often what separates ‘the ingenious entrepreneurial ideas that go up in flames’ from ‘the multi-million-dollar empires that become the legacies of our time’. 

So let’s dig in a bit here. How can you create more financial confidence in your business? 

First…

Start to Understand Your Business Finances with the Basics

I say “get back to basics” but in reality, too few business owners even scratch the surface of the basics. 

And I get it. 

The temptation to skip those first-year accounting lessons can feel a bit like dodging tedious, incomprehensible homework assignments in grade school.

But here’s the thing…

If you want to make sound, growth-oriented business decisions, you need at least a baseline understanding of the way your finances work.

How do you want to look at your finance balance sheets? 

So first, familiarize yourself with cash vs. accrual accounting… 

And determine which is the best fit for the kind of business you’re running.

You’ll quickly realize that accounting is more than just crunching numbers, and your business will be better off following the right method.  

Did you realize there are different types of expenses?

Next, unchain yourself from the common misconception that all expenses are the same.

Start by paying attention to both your Costs of Goods Sold and Operating Expenses — and making the distinction between the two. 

Operating expenses (OPEX)

Your Operating Expenses will give you a good idea of whether you need to cut costs, or whether you’ve got some wiggle room to add in a couple of nice-to-haves. 

Cost of goods sold (COGS)

Your Costs of Goods Sold will help you determine whether you’re charging enough for your products or services to begin with… We can quickly see if you’re selling things for a profit or loss. And how your price points and profit size up against the competition. 

It’s actually not quite as complicated as we fear it is, and understanding the nuances can make all the difference in how we approach our books. 

Now, once you’ve got a solid grip on both of these principles, your mind may start venturing off into a world of other questions… 

Is your business even registered the right way?

Take some time to comb through the pros and cons of an LLC vs. a C or S Corp and decide which makes the most sense for your business. 

And above all, make sure you avoid the trap that keeps so many business owners in the dark about their financials… 

Don’t Be Afraid to Ask Questions!

Don’t  shy away from telling me when they don’t understand something. 

It inevitably happens with every client, and I have to whack them up over the head with the same wakeup call…

Do NOT be afraid to ask for clarity when something isn’t adding up for you.

This isn’t 11th-grade math class.

There are no scary teachers here sifting through tests with a fat red pen. 

In fact, I encourage my clients to ask me as many questions as they can think of, so they feel confident about the story behind their numbers and the way they’ve set up their business. 

Believe me, no question is too mundane for you to mention…

What’s the difference between a 1099 or W-2…

When and how can you use debt to responsibly leverage your business…

What’s debt financing … 

Can you get a bank loan… 

Or figuring out what kind of insurance you’re required (or just should have). 

Asking questions will increase your confidence and help your business grow. Business finance doesn’t need to be your day to day, but understanding it will allow you to make more informed decisions and focus on the long term health of your company. 

The Golden Rule for Business and Financing 

If I can leave you with essential thought for gaining confidence in your business’ financials, it’s this:

Personal expenses and business expenses do not mesh. 

Sure, it seems obvious enough, but the reality is, I’ve known way too many people who’ve let this golden rule slip through the cracks.

They’re either taking advantage of an opportunity they see in keeping everything muddled together…

Or they simply haven’t been taught the importance of separating them, and feel it’s easier to keep everything in the same account.  

That’s a mistake. 

See, if you don’t separate your business and personal expenses, it can mean some huge trouble come tax time, plus paying hefty fees enlisting an accountant to sort through the wreckage. 

So first things first, make a concerted effort to get organized about the numbers and which accounts they belong to. 

And if you can’t,  invest in an accounting system, even though the prospect of putting one to work can be downright terrifying. 

Remember this… 

You cannot allow fear of your business’ financials to keep you from getting a solid command over the basics. 

Don’t be afraid of math. (Remember, no one’s grading you!)

Spend some time getting organized, doing your homework, and setting things up — the RIGHT way. 

Then you’ll have the confidence you need to channel abundance into your business…

Which will spill over into an oh-so-satisfying personal life. 

If you know you could use a confidence boost in this area but you’re not sure where to start, don’t hesitate to reach out! Ask an expert for the clarity you need today.


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