Entrepreneurial Finance: The Function of Financial Statements

Money is the bottom line. We start, grow and invest in businesses for money. All the pains, highs and lows of business ownership are to provide for the business owner’s family, lifestyle, employees and so forth. Money allows entrepreneurs to open their business, and it is the key component to keeping the business open. While we may master our inventories, be the best at the services we offer or are brilliant at research and innovation, each business needs money to survive.

Despite the simple objective to make money in business, it is very common amongst entrepreneurs and business owners to overlook their abilities to manage the business finances. Many business owners will engage a bookkeeper or an accountant to set-up and manage the books. Others will buy financial accounting software programs and do their best to understand the power behind those types of software. However, a solid understanding of the business financial statements is critical for all business leaders regardless of how the reports are generated.

The good news is that regardless of the legal structure, type of business or size of business, the same basic financial statements apply. The financial statements are to serve as a mechanism of internal fiscal control, a tool to attract investors, a snapshot into the fiscal health of the company, a way to capture fraud before the business suffers major losses and a means to evaluate the overall functions of the business.

The first financial statement that a business needs to regularly generate is the income statement (also known as the profit and loss statement). Most businesses will want to generate this report on a monthly basis and compare the information with the previous months or to the same month from the previous year or two. If the business hasn’t opened yet, then the entrepreneur will want to generate an income statement for the first twelve months based on projected numbers they think the business will achieve. These projections need to be realistic and will be based off the market research completed during the business planning process.

The first section of the income statement will review the reporting time period’s gross revenues or how much money the business made during that time. Business owners need to include the total dollar amount of the returns and allowances the business gave in that time. The net revenue is found through subtracting the gross revenues from the returns. This is how much money the business made in the given reporting period.

The next section looks at the cost of goods sold. The business should list each major line item that contributes to how much the business pays for the products being sold. For instance, a manufacturer of widgets would track the costs of raw materials, and a retailer may wish to track the direct costs of inventory. Service oriented agencies can total the cost of delivering the service or they may opt to track overhead expenses in the next section.

The third section on the income statement tracks the operating expenses of the business (also known as overhead). Here the business should track salary expenses, which should include salary, payroll tax and any fringe benefits that the company will pay. This section should also include; rent or mortgage expenses, property taxes, sales taxes, depreciation expenses, utilities expenses, advertising expenses, insurance expenses, and any regular expenses incurred by the business.

The last section of the income statement will look at other expenses the business has on a regular basis. Typically, this is where loan interest is noted. While the business owner writes one check to pay off a loan or debt, the principal and interest are traced separately on the financial statements.

To finish the income statement, take the net revenue from section one and subtract that from the total cost of goods sold, operating expenses and other expenses. The resulting number will be your profit or loss for the reporting period.

The second financial statement is the balance sheet. The balance sheet lists all the assets and liabilities for the company. In simplest terms, this is a snapshot of the financial health of the company. A healthy business will show a well rounded balance of assets to liabilities.

On the balance sheet, current assets should be listed first. Current assets includes how much the business has in the bank, accounts receivable, inventory or any other account the business has money available in. Additionally, the business should also list all fixed assets it has. Under the fixed assets section, the business should list the value of all the land that it owns, the value of the building (if owned), value of any cars or major pieces of property owned by the business. The fixed assets should also note the cost of depreciation for any property owned by the business as well. The total fixed assets will be the value of the assets minus the depreciation.

Next, the balance sheet will list all current liabilities. Current liabilities include accounts payable, notes payable (credits, etc.) and taxes payable. Additionally, the balance sheet will list long term liabilities, which include building mortgage payable, equipment loan payable or other large debts owed by the business. Lastly, the owner’s equity will have its own line item on the balance sheet.

The magic of the balance sheet is the total assets added together, should equal the total number of liabilities plus owners equity added together. If the two numbers do not match, then a problem exists in the business or in the preparation of the balance sheet.

Whether the business owner hires help to establish and maintain the financial statements and books or whether they seek to maintain this information on their own, it is important to understand how the numbers work and what the numbers mean. Watching the business financial statements will help guide the business along in its progress, prevent fraud, alert the owner to business trends and show the business owner how the business is working for him or her.

What’s Your Story?

Stories have played a critical role in society since the beginning of the human race. Without stories, much of our histories would have been lost through the ages. Even today, stories are a critical component of our lives. We hear stories each time the remote control is grabbed, we tell stories about our weekends or our children, we share what is personal to us in stories. Likewise, your business has a story. More amazingly, your business story can be told  in 30 seconds. Whether you have less than a minute or 15 minutes, the business owner needs to identify and be prepared to tell that story.

BJ McCabe, a business coach and storyteller, notes that her job is to teach high level businessmen or woman how to tell stories – business stories. “Each of us has a lifetime of experiences that have helped to inform us of who we are, what matters and shapes how we interact with others. The primary importance a of story (as I see it) is to help us make sense of our experiences.”

Carmine Gallo (in Business Week’s article “Mastering the 30-Second Pitch”) notes that when telling your story you should answer the following four questions:

1. What problem do I solve?
2. What is my service, product or company?
3. How am I different?
4. Why should you care?

What is your business story? What can you teach me about your business so that I will want to ask you for more stories and information? People really do want to hear your story, what is keeping you from sharing it?

Scientific Advertising

Knowing advertising is a discipline of marketing just like sales, did you know that advertising and sales are the same? The difference between the two is the delivery method. However, many businesses approach advertising like they are playing Black Jack.

The art of advertising has been in use since Egyptians began using papyrus to share messages. Today, individuals are bombarded with thousands of advertising messages a day. The challenge in advertising is reaching the exact person who needs your product or service, interest them enough to absorb your message then you need to take action.

Given the countless ways of reaching consumers today, the more you know about your ideal customer, the easier it will be to devise plans to sharing your message with that person (note – get out from behind your desk). Whether you place an ad in the paper, send direct mail, put ads on the internet or blog your message, there are fundamentals to follow in advertising.

Claude C. Hopkins wrote “Scientific Advertising” in 1923, in which he shares advertising fundamentals that continue to hold true even with the advent of new media marketing outlets. Mr. Hopkins’ conclusions were based on experience and testing that he had done throughout his career. His conclusions were not based off trends or opinions, which makes his information necessary for any business.

You can download his free short book “Scientific Advertising” at http://www.backchannelmedia.com/documents/ScientificAdvertising-ClaudeHopkins-1923.pdf .

Balancing Act

You are a business owner whose day begins well before the sun rises: you need to get the children dressed and to school, attend a 7:30 meeting, get started on email via the Blackberry, get to the office to find employees having problems, return voicemail messages and discover business operations that need addressing. This is all before 9:00 a.m. During the day, you have customers, vendors and your CPA begging for your attention before your children need to be taxied to tutoring or soccer, your spouse needs help at home and you still need to engage in business planning, balance the day’s financials and review business performance. How do you balance life’s needs in running a business?

While there are countless resources on the subject, people continue to feel the pressures of managing their personal, family and business lives. Each day puts direct and indirect pressure on our lives to act a certain way, obtain certain goals, and engage in certain activities. We receive countless messages on what our lives should look like, feel like and achieve. Add those pressures to the reality of your day, and you have a much stressed out situation.

To combat life and work toward balance, the Mayo Clinic has the following tips to consider:

1. Keep a log. We all have 168 hours a week, no more or no less. Try to track everything you do for one week and how much time it takes (even brushing your teeth) so that you can account for the 168 hour week. Review your week and see what activities you are doing for necessity, that you enjoy and that you could live without. For the “live without” items, can you delegate or outsource those at work and/or at home?
2. Learn to say no. Whether it’s a civic club asking you to spearhead an extra project or your child’s teacher asking you to manage the class play, remember that it’s OK to respectfully say no. When you quit doing the things you only do out of guilt or a false sense of obligation, you’ll make more room in your life for the activities that are meaningful to you.
3. Leave work at work. With today’s global business mentality and the technology to connect to anyone at any time from virtually anywhere, there’s no boundary between work and home — unless you create it. Make a conscious decision to separate work time from personal time.
4. Manage your time. Organize household tasks efficiently. Doing one or two loads of laundry every day, rather than saving it all for your day off, and running errands in batches are good places to begin. A weekly family calendar of important dates and a daily list of to-dos will help you avoid deadline panic. Include your children in adding their calendar items too.
5. Communicate clearly. Limit time-consuming misunderstandings by communicating clearly and listening carefully. Take notes if necessary.
6. Nurture yourself. Set aside time at least once a week (preferably more) for an activity that you enjoy, such as walking, working out or listening to music.
7. Set aside one night each week for recreation. Take the phone off the hook, power down the computer and turn off the TV. Discover activities you can do with your partner, family or friends, such as playing golf, fishing or canoeing. Making time for activities you enjoy will rejuvenate you.
8. Protect your day off. Try to schedule some of your routine chores on workdays so that your days off are more relaxing.
9. Get enough sleep. There’s nothing as stressful and potentially dangerous as working when you’re sleep-deprived. Not only is your productivity affected, but also you can make costly mistakes. You may then have to work even more hours to make up for these mistakes.
10. Bolster your support system. Find a mentor (you can have more than one) to help you with your business. This gives you an outlet for the various challenges you will face in being a business owner away from others in your life who may not be able to give you the support you need.