Non Profits & Small Business – 3 Keys to Finance Basics

Businesses of all sizes will eventually need to prepare and manage three basic financial statements.  They are included in any comprehensive Business Plan and I will show you how they are commonly used for business strategy and routine Operations Management decisions.  These are the Profit & Loss Statement (P&L), the Balance Sheet, and the Cash Flow Statement.  I admit these can be both intimidating and confusing yet the sooner a business can use these as a compass the sooner they can be financially independent.

They will be asked for by any Business Analyst, Loan Officer, or Financial Advisor of your business so what are they?

Defined

Profit & Loss Statement (P&L) –  Also called an income statement.  This is a consolidated record showing how much you have spent (expenses) and how much you have made in revenue.  The two are calculated showing what your net income is over a specific period of time.  The period of time these show may depend on the industry you are in and typically are either by calander months, fiscal period(typically 28 days), or weekly.  It is also very common to have quarterly P&L showing a consolidated series of numbers that help you determine if it is time to sound the alarm or not.

Balance Sheet – This is a dashboard of your companies overall health.  It provides a summary of the businesses assets, liabilities and net worth.  Essentially the balance sheet tells you what you own and what you owe.  Assets are resources your business controls such as cash, equipment, buildings, furniture, inventory and money owed to you.  Your Liabilities will be the obligations you owe to others such as payroll, taxes,  Accounts payables or loans.  Your net worth is what is left over.

Cash Flow Statement –  This report demonstrates how cash has flowed in and out of your business over that time period.  Typical software programs to produce all of these would be Quicken or  Peachtree if you do your numbers your self (opposed to an Accounting Firm) or for smaller or really savvy businesses Excel works just fine.

How you use themthe 101

P&L – Depending on the scope of your business the P&L Statement can be very complicated or extremely simple.  The key is to have it inclusive of money going in and out of the business over a set period of time.  All expenses should be categorized so that at a glance you can tell why and where they are up or down from a previous period or the “forecast” budgeted amount .  Similar with revenue.  The more information the better because this tool will not only help track history, but it will help you predict future spending in most areas.  The expenses are commonly broken down into two categories; “Controllable and Non Controllable”.  Examples of non controllable expenses would be rent, loans & taxes.  Controllables are pretty much anything you can say “NO” to (much more on that another time).  This report will subtract the expenses from the revenues and show your “net profit” at the bottom.  This is a very important report for the Operations Management team to utilize and if used properly it can be very effective in containing costs and contribute to a positive cash flow for the company.   But it is not all inclusive and needs to be used in conjunction with the other two forms.

Tip – A “best practice” I have all my clients do is when using a P&L is to have all expenses broken down as a percentage of total revenue that is expected.  Manage by using the percentages and not necessarily the dollars on the form.  Ex:  (Forecasted Revenue is always 100%).  Say labor is expected to be 15% of your revenue $.  Then lets say Revenue is down a little.  The manager can either adjust labor or not during that month.  Well if labor comes in at 14% of  projected revenue, you may still be ok in that category.  If labor comes in at 20% because the manager did not use the P&L to make adjustments, then you have lost money.  Same goes for every line on the P&L.  The more information you have, the better your daily decsions could be!

Balance Sheet –  This report is generally broken into a few areas.  Assests will be broken into categories depending on how accessible they are or how quickly you may expect to use them.  “Current or Fixed”  is common terminology.  Current assets, often referred to as “Liquid” means you could use it today if needed (cash, accounts receivables, or short term investments) and are usually listed first.  Followed by Fixed assets which may be a building or equipment you own.  While you could free up money invested in these it may take some time to access it.  Under Fixed assets you are likely to find “Depreciation” which is the amount of money estimated to be used up from the fixed assets. Meaning,  if you had to sell them today, what would they actually be worth?  If you subtract the depreciation from the Fixed assets you will determine how much is available or “net Assets”

Liabilities are listed next and they are everything that the business owes to someone else.  Accounts payable, taxes, loans, wages, etc.  Similar to assets these are also categorized by time frames, although Liabilities are listed by due dates.  If your business has a invoice that has 90 days on it, it won’t be listed on your P&L, but will be listed on your balance sheet.

Both the assets and the liabilities are then subtracted from the assets to determine a businesses “Net worth” or “Owner Equity”.  In short it is a snapshot of what you would have left if you had to sell the business today after you paid everything off that you owed.  Most would agree, it is a good idea to keep an eye on this figure!

Cash Flow Sheet –  depending what type of business you are will determine the frequency in which you use this report.  Any organization that may have an unpredictable revenue stream will rely on it more frequently.  As one Non Profit client put it, “this report essentially shows you how much air you have left”.  This report will not only list what cash is expect to come in and go out of the business, but it calculates a time frame of how long the business could continue should things change drastically.  Generally measured in days weeks or months depending on the size of the Balance Sheet numbers.  In a larger corporate environment this is only reviewed by the most senior level Executives but for Small Businesses and Non Profits, who tend to live “day to day” this can be a helpful report to review quarterly.  Because using just a P&L, like so many companies do, can be deceiving.  It may look like you made money during a specific period but other expenses not appearing on a monthly P&L may come to terms.  Remember the 90 day invoice I mentioned earlier?  Well that may also need to be paid which can throw off your cash accounts.  A Cash Flow sheet would show what will be due and help you plan for it so you don’t become over extended.  As mentioned this is particularly important for many small or seasonal based businesses and pretty much all Non Profits.

As mentioned most software packages on the market will take a lot of the work out of creating these important reports for you.  All it takes is a small time investment to load all the information on a daily basis.  If you prefer to hire an Accounting Firm to get you started, I work with several I would be happy to recommend.  I guarantee that using these standard Financial tools will improve your businesses ability to generate revenue.

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Carpe diem!

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