How To Keep Track Of Money In Your Business

When was the last time you really looked at your finances? It’s tax season right now so I’m sure you’ve been a little extra sensitive about where your money is coming from and where it’s going but, checking your online statements from the bank or credit processing company does not count. 

Better question – are you still on pace to make/earn/generate whatever income you quoted for yourself in those initial projections in <insert time of start here>? 

Are you tracking everything or is it more of a check book balance ballet? The checkbook balance ballet is a display of grace, creativity and checkbook ninja’ing that makes you proud that you made it to the end of another month, quarter or even week.  

Last question I promise, do you actually understand how QuickBooks works or are you just winging it? I would rather hear that you are keeping track of expenses in a raw unedited list of an Excel file instead of winging it through QuickBooks. 

One of my favorite things to hear about a business’ finances is when I hear owners and entrepreneurs tell me they are too busy to worry about the minutiae details of the finances and that as long as there is cash in the register they are doing OK. 

Those individuals couldn’t be any more wrong. 

This post is aimed at being your businesses minimum viable finance fundamentals crash course and it is going to teach you how to organize and what to look for in your Income Statements (Profit/Loss) and your Statements of Cash Flows. These steps and tips will help you plan better so that you are spending better (read: more efficiently). It’s also a good idea to know when your endeavor is hemorrhaging resources so that you can do some entrepreneurial triage and get yourself back on track. 

Cash Flow Statement  

A Cash Flow Statement (CFS) measures the amount of cash and cash equivalents that are coming in and going out of your business. A CFS literally follows the money. No, your bank account statements, check register, or receipt tapes are not CFS’s. All the information that those sources and sources like that provide should be housed in one easy to find and easy to read place. Remember it’s all liquid resources, no Accounts Receivable or Accounts Payable here – just cold hard cash (flow). 

Here’s what cash flow will look like. First it starts with your cash on hand for the period you are measuring like days, weeks, months, quarters, etc. Then you should break it out into three big sections. Cash flows from operations, finance activity, and asset activities. Within each one of those sections you will be listing the cash-ins then cash-outs and a subtotal for each section. (Positive cash flow implies more cash in than cash out which is a good thing most of the time.)  Lastly you tally the three sections add in your beginning of period cash and what you are left with is your cash at the end of the period all nice and tidy right?! Not always. Now that you have an idea of what the statement will look like let’s break out those sections. 

Operations

This is the cash that comes in or goes out that is directly related to the core business operations. The biggest cash-in you will probably encounter is the income/revenue received from sales or services offered. After that common cash-outs will be stuff like: rent, utilities, payroll, and inventory. If the expenditure has anything to do with the core business operation and it was paid in cash it will be categorized under operations. 

Asset Activity (Economic Investment)

This is the cash flow activity surrounding bigger ticket items. These are things that would be categorized as plant, property or equipment. Let’s take a look at an example. Say you sold an old delivery van so that you could buy a new oven for your bakery. It would be a cash-in under Asset Activity for the sale of the delivery van and a cash-out for the purchase of the oven. If those were the only two transactions that period and you had cash left over you would have a positive cash balance in this section. 

Lastly is Finance Activity

This is the cash activity that relates to how you are using your money. If you took out a loan and have to make payments every month. That would be a cash-out. If you are an S-Corp or an LLC and you pay dividends or make disbursements to the shareholders that is a cash-out.  If you issued any stock or sold any bonds to raise money then those activities would be cash-ins. 

The goal for the CFS is to stack the information from period to period next to each other. You want to be able to look for trends, patterns, or things that are out of the ordinary. This will be able to help you find spots where you could potentially save money or give insight on where your money is going every month. One of the most popular things I hear from entrepreneurs is that they feel like they pour huge sums of money into their businesses and then look around and are unable to fathom where that money went. Your CFS will show you exactly where all that money went. 

Profit and Loss Statement/Income Statement  

An Income Statement or Profit and Loss Statement (P/L) is a financial statement that outlines your business’ revenue and measures it against your expenses. The goal is to find out how profitable your business is for that period and the periods to follow. It’s a crucial planning tool because it shows you exactly what your business is doing and whether or not you are sticking to the budgets you started your entrepreneurial adventure with. The P/L can also help you keep tabs on things like rates of product returns, and making sure that your costs to bring your product or service to market don’t get too out of control. This is different than the CFS because it takes your Accounts Receivables and Payables into consideration as well as a few other non-cash accounting measures like depreciation. 

There’s a little more involved with the P/L so let’s jump right into what goes into it. Then, we can talk a little more about how to use both of these statements to keep your business running like the well-oiled machine you thought it could be at the start. 

Net Sales

The net sales figure represents the amount of revenue or income generated by the business. The dollar figure recorded here is the total sales, less any product returns or sales discounts.  This is what you want to keep an eye on if you are starting to look at how fast your business is growing.

Cost of Goods Sold (COGS) 

This represents the costs directly associated with making or acquiring your products or services. Costs include materials purchased from suppliers used in the creation of your product, as well as any internal expenses directly expended. If you are a service based like a cleaning business costs might include the supplies used to get to the final deliverable. 

Gross profit

Gross profit comes from subtracting the cost of goods sold from net sales. It does not include any operating expenses or income taxes. Focusing on how much your Gross Profit is changing over time in its own amount as well as in relation to your Costs of Goods Sold can be important to follow. Financial goals can be to manage and maintain your gross profits as you scale your production up. 

Operating expenses

These are the everyday expenses incurred in the operation of your business. Some of these categories will even match some of the items in your CFS. In this sample, they are divided into two categories: fixed expenses and variable expenses. 

Payroll and Salary

These are the salaries, wages, and payroll plus bonuses and commissions paid to your staff. It’s for full time and part-time alike. 

General, Selling, and Administrative

This item is made up of all the direct and indirect selling expenses and the administrative expenses associated with being in business. These could be costs associated with advertising or marketing your products or services, travel, meals, equipment rental, and printing costs. It’s an umbrella for everything that’s not Operating, COGS, or Payroll.  
Rent: These are the fees incurred to rent or lease office or industrial space.
Utilities

These include costs for internet, cable, heating, air conditioning, electricity, phone equipment rental, and phone usage used in connection with your business. 
Depreciation

Depreciation is an annual expense that takes into account the loss in value of equipment used in your business. Examples of equipment that may be subject to depreciation include copiers, computers, printers, and fax machines.
Miscellaneous Expenses

Expense items that do not fall into other categories or cannot be clearly associated with a particular product or function are considered to be other overhead costs. These types of expenses may include insurance, office supplies, or cleaning services. It is crucial that you outline each of these costs as sub-items below this heading. 
Total expenses

This is the summation of all expenses incurred in running your business. It does not include any taxes or interest expense on interest income if there is any.

<Take a breath> A little recap. 

If you are following along, you have outlined the quantity of sales that have come in. Then you subtract away the cost of making the sales to get to Gross Profit. Then you subtract away all the rest of the expenses and costs of doing business in general and that leaves you with another magic number – Net Income Before Taxes. This, like Gross Profit, is another place you want to keep an eye one. An example of something that you may encounter is your Gross Profit is increasing but your Net Income Before Taxes is staying the same or getting worse. Big Red Flag! When you see that it’s time to get back into those expenses and CFS for the period and investigate where all your potential profit is going. Ok, on we go…

Net Income Before Taxes

This number represents the amount of income earned by a business prior to paying income taxes.  I had to state it like this just for the sake of good form. 

Taxes

This is the amount of income taxes you owe to the federal government and, if applicable, state and local government taxes. Pro Tip: Don’t sleep on your taxes. I’ve seen instances where the IRS can and will issue liens on bank accounts. That makes operating your business very tricky if you don’t have access to your accounts. It makes paying employees even trickier. Stay on top of your reporting or get some help with it. The IRS aren’t the bad guys (not all the time anyway) and they are willing to work with you but you have to have your act together. 

Net income

This is the amount of money the business has earned after all your expenses, interest payments and paying income taxes. This is wrongfully the first place a lot of businesses look to figure out the health of the business. Don’t let this be you. It’s also easy to see extra money and just put it in your pocket – also a bad idea. You have to evaluate the opportunity costs of using that Net Income in a variety of ways. Sure your pocket is one way but so is reinvestment, increasing the pay of your employees, paying down and debt more rapidly, or just saving it for a rainy day. 

Lastly if it’s negative then you definitely need to dig back into these financial statements and figure out where your resources are going as well as ways to increases those sales numbers at the top. I don’t want to spend too much more time in these statements though – think of this as a reawakening to your financial management responsibilities. Let’s get into some metrics you can use to gage the health of your business without worrying about flipping through each line item of each statement.

You may have noticed that there was no talk of the Balance Sheet. Not because you shouldn’t like or care for the balance sheet but because when you are in the trenches and trying to make changes on the fly you will need the most up to date information possible. You are going to want to keep an eye on the speed at which money is coming in and out of your situation. The Balance Sheet is more of a long term snapshot. Just like with the P/L and the CFS, there is a template for the Balance Sheet and some information on Balance Sheets in the Resource Section at the end of this book. 

On to the ratios. 

The two types of ratios that are really important for figuring where you stand and how to plan are efficiency ratios and liquidity ratios. How this is going to go is I will give you a brief description and then the ratio. The idea is that you start using these ratios to not only track your own progress but that of your industry. You can get some industry ratios from places like census.gov and others by doing simple searches in Google. 

Quick Ratio

Is a measure of a company’s ability to handle debt if it needed to, or its short term liquidity. The higher the ratio the more liquid the firm - which is a good thing. 
= Current Assets - Inventory/Current Liabilities
Debt to Equity Ratio 

This measures your leverage. It’s how much debt have you used to help your company grow. Having and managing debt can be a good or a bad thing depending on how you handle it. The important thing is keep track of what the ratio is doing over time as well how you servicing your debt. More debt might not always mean more growth. 
= Total Liabilities/Owners Equity 

Interest Coverage Ratio

This is an interesting one. In the planning process it’s easy to get caught up in showing that you can cover and debt that will be issued. It’s equally, if not more, important to make sure that you can cover the interest payments that go along with that debt. Here the rule is a ratio of 1 or more means you can service all your obligatory interest. 
= Operating Profit/Interest Payment

Collection Period

This ratio will help you keep track of how long it takes clients or customers to pay. The longer the period the more working capital you may need to support your business while waiting for payment. Remember efficient businesses don’t really use much extra cash. It can also help keep your payment policies tracked and enforced. 
= Ending Accounts Receivable/ Revenue per Day

Lastly ROA and ROE

Both of these ratios will help you get a sense of how much return you are getting out of your Assets (A) and your Owners Equity (E). As you keep track of this you will be able to see how capital expenditures are affecting your bottom line or if you are really using everything you have to it’s best potential. Having the money to buy stuff is great but buying stuff alone is not going to make you money. You need to manage the stuff and the people in charge of that stuff appropriately. 
= Net Profits/Assets and Net Profits or/Owner's Equity

Now this is not the conclusive list. These are a few key ratios you should start with when you are snapping out of the entrepreneurial honeymoon. From here it will help you to pick the spots in your financials that you want to focus on and work on to make stronger. These are some of the ratios that can help you see patterns for better or worse before the raw data might indicate. The statements these variables come from also vary in length and complexity. You need to keep on top of this so that you can confidently focus more time on doing the work that matters most to the people you serve. 

Otherwise, you might not be in business for as long as you planned. #moneymatters