FINANCIAL LITERACY LEARNING CENTER

SMALL BUSINESS

FINANCIAL MANAGEMENT

BOOKKEEPING IS THE ORGANIZED PROCESS OF TRACKING ALL INCOME AND EXPENSES AND IS THE BASIS FOR ALL FINANCIAL MANAGEMENT, BUSINESS DECISIONS, FINANCING, TAXES, OWNER’S DRAW AND RETIREMENT

BOOKKEEPING STEPS

Obtain business accounting software. Effective software is critical for success.
Open a separate business checking account. Do not mix personal and business accounts.
Reconcile your checking account. Do this each month using business accounting software.
Track sales. Create a foolproof system for tracking sales and use it consistently. Use tools such as register tape, invoices and a sales book.
Deposit all sales. You can do this using your business checking account, or if available at your bank, remote deposit capture. Total sales should equal total deposits.
Write business checks for business expenses. Do not use petty cash until you are experienced at bookkeeping and have an effective system down.
Obtain a separate business credit card. This will also help you with tracking expenses.
Pay business expenses first. After all expenses are accounted for and paid, then you can take an owner’s draw.
Generate and use a profit and loss (P&L) statement. This statement will provide you with the most accurate depiction of the organization’s financial health.
Pay yourself with the owner’s draw. Transfer money directly from your business account into your personal account. It helps to assign the payments to an equity account called “Draws.”

FINANCIAL STATEMENTS

There are three basic financial statements that your business should have: balance sheet, cash flow projection (or statement), and profit and loss statement. These statements will not only help you in making key decisions, but they also show investors and other stakeholders what the overall financial health of your business is. These statements tell a story using numbers and they can easily be generated using accounting and bookkeeping software.

BALANCE SHEET

A balance sheet is a snapshot of the business at a specific point in time. It lists the company’s assets (cash, accounts receivable, inventory, investments, land, equipment and other tangible items), liabilities (debts, including accounts payable and loans payable) and the owner’s equity (amount of assets that came from the owner). The assets (on the left) should equal the same as liabilities and owner’s equity (on the right). Balance sheets are used in the application process for a loan. Lenders use these to compare how much of your own money you plan to invest against the amount you need to borrow. The higher the proportion of owner’s equity to debt, the better. You can use opening and closing balance sheets to compare and identify sales trends from year to year.

CASH FLOW PROJECTION

A cash flow projection shows how cash is expected to flow in and out of the business over a period of time. A cash flow statement shows how cash has historically flowed in and out of the business. A projection will help you manage your cash by showing if the cash coming in is enough to cover the cash moving out. This is a useful tool for setting goals and planning for expenses. It also helps to determine your break-even point during the start-up or expansion stage. Cash flow projections are also usually required in the loan application process. They show lenders your ability to manage cash in the future so that you’re able to pay back the loan.

INCOME STATEMENT

A profit and loss statement (or income statement) measures the business revenue and expenses over a month, quarter or year. This shows if the company is making a profit or incurring a loss. The P&L statement measures the ability of your business to grow and repay debt. The basic formula is sales (cost of goods sold/gross profit) minus overhead equals net profit.

BUSINESS FINANCING DO’S AND DON’TS

Invest your own money. This shows investors and lenders your commitment to running a successful business.
Earn the right to borrow. Borrowing is a privilege; in order to obtain financing from others, you need to show your ability to manage debt.
Show profitability. Lenders want to see that you are able to run a profitable business.
Understand and keep working capital. It’s a critical component to supporting operations and should grow as your business grows.
Match sources and uses of funds. Current assets should be financed with current liabilities, and fixed assets should be financed with long-term loans that match the use life of the asset. Not doing so can result in having to pay for an asset faster than the asset can generate profits.
Understand collateral options. Most loans need to be secured with an asset, which is then sold off if you default on the loan.
Understand risks and costs for loan types. All loans carry risks and costs. Decide what makes the most sense for your business.
Shop around. Start with your current bank and go from there to get the best loan with the least amount of risk associated.
Get expert advice. There are several resources for small businesses, including the Small Business Administration, FDIC or your own banker.

CRITERIA FOR QUALIFYING A LOAN

There are important factors that lenders will look at when deciding whether or not to qualify a loan for your business. This is where having a good credit score is crucial. Having a good credit score will show lenders that you have the ability to repay a loan. Having a bad credit score can prevent you from obtaining the financing you need, or require you to have a co-signer. Another factor to consider is equity contribution, or the amount of money you personally have contributed. This shows your commitment to the business. Lenders will also look at your ability to repay a loan by analyzing provided financial statements. The criteria varies from lender to lender, however you can be certain they all want to see strong profits and good cash management skills. The last thing looked at to qualify a loan is the loan-to-value ratio. Lenders will typically loan between 70 and 90 percent of the market value of an asset. Ensuring you have this criteria met will greatly increase your chances of getting the financing you need.