In order to be a successful business owner, you must have a basic understanding of a variety of different subjects. While number-crunching may not top your list of favorite pastimes, it's crucial to master these five key finance skills for small and midsized business owners:
1. Track Your Cash Flow
Your cash flow measures the amount of money that is flowing in and out of your company. As a small business owner, it's important that you know how to monitor this figure on a constant basis. After all, your cash flow tells you how well you're managing your revenue and expenses. This is an important figure to have on hand for any potential investors.
2. Know Your Net Income
Your net income represents your total earnings after you've paid all of your expenses and taxes. Regardless of your industry, it's important that you're able to determine this figure. The larger your net income, the better. If this number is below zero, you need to examine your cash flow to find the problem.
3. Understand Your Different Financial Statements
If you're able to decipher your income statement, balance sheet and cash flow statement, you'll be better-equipped to talk to your accountant, banker and lawyer about your business. Your income statement shows your income and expenses, and may be prepared on a monthly or quarterly basis. A balance sheet is a snapshot of your business finances that shows what your business owns, owes and is worth at a given moment in time. Finally, a cash flow statement shows where the money came from and where it's going. For more information, visit the Small Business Administration's page on preparing financial statements.
4. Determine Smart Pricing in Your Market
It may take some time to learn how to price your products and services so that you can maximize your profit without becoming too expensive for your customers. To master the skill of smart pricing, you'll first need to calculate exactly how much it costs to produce each product or provide each service. Add the cost of supplies, and don't forget overhead costs such as office expenses, rent, payroll and even the sales tax you'll pay on your supplies. While you're at it, you can take a quick look at any publicly available competiror pricing list to see how you compare.
5. Monitor Your Sales and Inventory
It's important for you to know how to review your monthly inventory and sales records. If you notice your inventory is increasing while your sales are decreasing, this means that your business isn't doing as well as it was in the past. This type of trend indicates that you need to review your business plan, pricing and marketing activities.
In order to prevent potential issues down the line, it's important for you to invest in learning these key finance skills for small and midsized business owners.
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