Financial fundamentals for business owners

Published On November 25, 2013 | By Joseph (Ken) | Business, Corporate tax

fundamentals

In what seems to be a subtle advertisement for educational institutions Financial management skills found lacking for small contractors

According to a recent survey, many Canadian small business owners need to upgrade their financial management skills.”“According to the survey, which was undertaken by Angus Reid Public Opinion for accounting software developer Intuit Canada, about four out of five Canadian small business owners have no more than a very basic understanding of financial fundamentals.”

Realistically, the whole point in hiring an accountant is so that you, as a business owner, have someone on your team who understands financial fundamentals.  

It is the accountants job to analyze and retrieve critical financial data so that the business owner can make sound economic decisions.  

The article implies that business owners are lacking, if they don’t have more than a basic understanding of financial fundamentals, but that isn’t realistic.

A better article is Financial Fundamentals

And while it’s okay to outsource this activity so that someone else can do the work you don’t like to do, you need to be sure you understand the output of the financial information. You’ll need it to help make informed decisions about your business. Remember: Accounting isn’t just about taxes. There’s so much more to know about the numbers, so you’ll know how your business is doing from a management perspective.”

In saying that business owners only need a basic understanding of financial fundamentals, I’m saying they need enough to make informed decisions, but they don’t need to be an accountant themselves.

“There are a number of key parts of the financial picture that you need to be aware of, and they can be outlined based on the three critical financial statements your business generates: profit/loss, cash flow and balance sheet.

1) Profit / loss statement

“Having money in your checking account doesn’t mean you’re profitable. It could mean you haven’t paid all your bills so you still have a little cash on hand. But cash and profit are two different concepts. If you aren’t profitable, you won’t have long-term success in your business.”

2) Cash flow statement

“Did you know that you can show a profit and still have a negative cash flow? You can, if your loan payments, owner withdrawals and other non-expense activities are taking more cash out of your business than you have profit.

“The same is true on the opposite side of the flow: You can have a lot of cash coming into your business through an increase in personal or lender-financed activities and still not show a profit (because you’re not generating enough revenue).”

3) Balance sheet statement

“The equity balance reflects the value of your ownership in your business. When you take the value of your assets less the value of your liabilities, the remainder is your equity.

“It doesn’t matter the size of your business–profitability and ongoing financial stability are something you should be monitoring on a regular monthly basis.”

Does your accountant provide you with these three statements when they prepare your business year-end? Do they explain their importance relative to your business? They should, as they are an important part of helping you make informed decisions about your business.

 

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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