When you’re ready to begin addressing your small business finances, there are some terms that you have to be familiar with, in order to understand what’s really happening with your finances. The terms described below constitute a basis for understanding how your finances should be managed, and will help you make better decisions about conducting your business.
Expenses are all those costs which are subtracted from gross revenue, and are necessary to keep the business running. These operational expenses are things like taxes, utility payments, building rent, payroll, cost of goods sold, and pretty much everything else which is necessary to conduct your business. It will also include payments which are made for any outstanding loans you have.
Gross revenue is the figure which results when you add up all incoming money for a given period, which you have received from customers who buy your products or services. Unfortunately, this gross revenue figure is not money that you can keep, because from it all the expenses described above must be subtracted.
Cash flow represents the difference between the amount of cash you have on hand at the beginning of a month, versus the amount you have at the end of the month. Cash flows in from customer sales, investments, loans, and asset sales, and cash flows out to pay for operating expenses, debt service, direct expenses, and the purchase of inventory. Cash flow is extremely significant in small business finances, and in fact can cause a small business to fail if cash flow is inadequate. Even businesses which show profits can be in jeopardy if there isn’t enough cash on hand to meet daily, weekly, and monthly bills.
Net profit is the amount of money left over after you have subtracted all expenses from your gross revenue. If this is a positive number, then your business is profitable, and if the number is negative, your business was not profitable for the accounting period in question. Businesses which consistently show a negative net profit will probably not be operating for very long.
Are your finances in order?
It’s much easier to manage your small business finances when you have adequate financing to support your business. If you lack adequate financing, contact us at Business Capital Providers to explore some options which may benefit you and make financial management easier.