For example, if you make candles for $6 and sell them for $10, your gross profit is $4. Gross profit is the profit you make after subtracting the direct cost of producing a product or service. The top reason companies go out of business is because they run out of cash. A financial statement is a valuable tool for understanding exactly how your business is doing. It includes the balance sheet, profit and loss (P&L) or income statement, and cash-flow statements. Financial StatementĪ financial statement is a collection of all the reports documenting every financial transaction a company has made. It is a useful benchmark for performance and understanding profit. Income SheetĪn income sheet details the net profit a company makes in a period of time, based on all revenues minus all expenses. Keep in mind that while increasing production may lower the per item cost, it may also require hiring new staff, expanding operations or investing in new equipment, which can alter the outcome. “Knowing your marginal costs will help you figure out whether making more items will be profitable,” Stephens says. You can find it by dividing the total cost of production by the number of products you want to make and comparing the results.
Marginal cost is the difference in profit you make by selling one more unit. He suggests doing cash-flow forecasts at least once a year, and more often if cash flow is tight. You can use that forecast to build scenarios based on new projects or investments, or to determine when to invest in the business, pay off debts or to pay yourself, Stephens says. Cash-Flow ForecastĬomparing past cash-flow statements with projected income and expenses allows businesses to estimate the amount of money that will move through the organization in a future period of time. “The top reason companies go out of business is because they run out of cash.” 2. Remember, no matter how profitable you are, if you don’t have the cash to cover your expenses you will run into trouble, he warns. He recommends reviewing monthly and annual cash-flow statements to identify trends, set goals and predict coming ebbs and flows.
“It’s important to be aware of cash flow to time purchases,” says Ric Sinordo, CPA, CEO of Modern CPA Group, an accounting firm in Atlanta. It’s a calculation of all cash collected and spent on operations, investments and financing. Cash FlowĬash flow is a snapshot of the timing and amount of cash coming into and out of the business at any given time. These 10 accounting terms define the business accounting basics and can give business owners the insights they need to keep their operations running smoothly. But as they grow, taking time to learn basic accounting for small businesses can help them make better financial decisions, he says.
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They are so busy building the business they don’t have time to learn how to be a business leader. “At the beginning, most business owners have to be a ‘jack of all trades,’” says Rob Stephens, CPA, founder of CFO Perspective, a financial management firm for small businesses in Spokane, WA.
But if you want to turn that business into a thriving organization, you have to at least learn the basics. When you’ve got a small business to run, learning basic accounting terms doesn’t land high on the ‘to do’ list.
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