I am always amazed when I ask this question of small business owners. They say “There was money in my bank account when I checked it this morning”. You just can’t run a business that way. What about the checks you have already written and issued that have not cleared the bank yet? What about automatic payments that have not been posted to your account yet? With today’s immediate postings, deposits are usually current.
Please keep in mind that I am not a CPA and want you to speak with your business advisors before taking any actions this article may suggest. I am just a business owner who ALWAYS knows where the business sits financially. This also means knowing what billings are expected to be received and knowing what expenses are expected to be paid.
Let’s start with your Balance Sheet. You must remember this report shows where your business stands on a given date. The important current line items under Assets are the cash and accounts receivable. The important current line item under Liabilities is the accounts payable. In other words, how much money you have, how much money has been billed and how much money has to be paid out. Do the math. You should also understand if any of your accounts receivable are not collectible because, if not, you cannot consider this amount to pay your bills.
The Profit and Loss Statement shows the sales and expense activity for a given period. As an example, it may show from January through June. It will show your income (or sales) less your cost of sales leaving your gross profit. Then, all of your general and administrative costs (or overhead) will be listed. The bottom line is your net profit (or loss) for the given period of time. Please always remember your net profit is before taxes.
The above information may sound too simplistic to some but I am finding a lot of small business owners are so very involved in making sales and making the widgets that they sell, this very important part of their business is always an afterthought. It becomes serious when a check bounces or a client doesn’t pay when they are supposed to. KNOW WHERE YOU ARE FINANCIALLY AT ALL TIMES, PLEASE, PLEASE, PLEASE!!!!!
Linda Harris, CCA
Sounding Board LLC
702-497-4656
www.soundingboardlv.com