When you own a small business, you have deadlines to meet, customers to serve, orders to fill, and a million other things to do. Finding time to work on your business and manage your financials can feel overwhelming when you are knee-deep in day-to-day operations.

Managing your finances doesn’t mean drowning in spreadsheets.

Taking time to manage your finances is an important part of what it takes to run a profitable business. At a minimum, there are three basic financial documents that you can’t ignore — your balance sheet, profit and loss statement, and cash flow statement. By keeping these three documents up-to-date and within reach, you will always have a strong sense of the financial health of your company.

According to SCORE mentor and retired CPA Frank Curtis, “These financial statements are the keys to understanding any business. In a very precise way, you can determine if your business is growing and succeeding or failing.”

Balance Sheet: Your balance sheet is a snapshot of your business’ financials at any given moment and shows you if you’re in the red or the black. This financial statement lists your business’ assets, liabilities and equity. These elements together give you your company’s net worth.

Profit and Loss Statement: Your profit and loss statement, or P&L, is your income statement. A P&L summarizes your income and expenses during a period of time — usually by fiscal quarter and year. This is the financial statement you will use to understand how your revenues and costs impact your profitability.

Cash Flow Statement: Your cash flow statement shows your sources of incoming and outgoing cash over a period of time. Cash flow documents are helpful when assessing performance trends and other aspects of your business that wouldn’t be as evident if you were evaluating your business only on the basis of the balance sheet or P&L.

Manage Your Expectations

by Kelly Deis of SoundPoint Consulting 

Most business owners do not have a realistic idea of what their businesses are worth. Owners almost always think that their business is worth quite a bit more than the market would likely bear. There are several reasons for this.

1. Emotional Ties: Owners are personally and psychologically tied to their business. This is particularly true for long-running family businesses. 

An owner has poured their heart and soul into their business. Where others may see a mundane business, owners – like proud parents, see their business as an apple of their eye. This emotional tie may cause a disconnect with the realities of the market.

2. Lack of Analytics: Most small business owners do not have a grounding in the analytics which determine a company’s value. 

Sadly, I have run across several owners who negotiated a purchase price for their businesses with their gut, and ultimately overpaid. Now, they are hoping this is the baseline for the current valuation. Not surprisingly, this is not a criterion for prospective buyers. Most buyers value a business based on its cash flow. The original purchase price rarely – if ever, is a factor.