It takes much energy and time to run a small business. And intelligent and wise entrepreneurs always transfer high-impact tasks to more knowledgeable people if they can’t manage them. Even when small business owners might think of outsourcing financial functions, they need to understand what their experts suggest and recommend clearly.
Small business owners need to know and understand a few financial concepts to work with an advisor effectively. Paul Haarman shares some of the important financial concepts that small business owners should know:
Operating cash flow
OCF (Operating cash flow) is the lifeforce of a business. It suggests how a company is performing and also the runway length. Generally, a company needs to target a positive OCF which results in effective fund initiatives. If not, they should aim for a negative OCF that would fund high growth and sync with a sufficient cash runway.
Read the balance sheet
The majority of entrepreneurs can see a balance sheet and know its basics. However, they might not know the way to detect line items for exploring more. Business owners should trust the inner voice that at times says, “It’s a bit off.” However, outsourcing is a good idea, but a business owner always knows better about the business. Hence, business owners must have a better understanding of the balance sheet.
The gross sales and the net profits
Small business owners should know that gross sales don’t equal net profits. Most often, they concentrate on sales and forget to focus on the cost aspect of the business. Hence, understanding every line item of cost, knowing the industry averages for every line item, and having sufficient cash are essential for good business health.
Small business owners need to drill down the basic finances, and it is here that unit economics has a role to play. The objective is to know the revenues and costs linked with a specific business unit or product. According to Paul Haarman, the small business owners who know their unit economics can understand the business better and get taken more seriously by the investors and partners.
Return on Equity
It is an essential accounting concept to understand as it can determine whether you need to invest in your business or somewhere else. Each investment, regardless external or internal, comes with an opportunity expense. It is essential to constantly rate the performance, the return on equity against what can be earned by stock market investments.
When a small business is cash-flowing, then the owners should know its tax liability. It can differ based on the structure of the entity. However, if your business is profitable, you need to know what you owe to the income tax and its reason. That way, you can do all it takes to bring down the number while expanding personal assets or the business.
When a small business owner is aware of these financial concepts, they can work effectively with an advisor to better their business.