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You don’t have to be a ﬁnancial whiz to start your own business, but understanding the basics can mean the difference between collecting lots of cash or dealing with a financial crash. Ace these four accounting concepts and you may be more likely to achieve financial stability.
This financial statement provides a snapshot of what you own and owe. As the name suggests, each side of a balance sheet must “balance” out. That’s because a financially healthy business pays for everything it owns by either borrowing money or using funds from investors – even if the only investor is you. Still confused? Let’s break down the equation:
Why It Matters
Jess owns a successful bakery and wants to open a second location just six months in. Banks and other lenders will use her balance sheet to decide if it’s a good idea to loan her money. Even if banks make her nervous, and she asks her Uncle Bob to invest in her second storefront instead, he’ll want her to show that she can offer him good returns on his money (if he’s smart). Jess can also use her balance sheet to track the bakery’s financial wellness and spot issues that need addressed.
This is all the cash going into and out of a business, and it is one common reason why startups fail. That’s because newbies don’t often have much in the way of extra cash to cover emergencies. If you spend more than the business earns, or your customers don’t pay you fast enough so that you can pay your own bills on time, that can spell trouble.
Why It Matters
Pat is a chiropractor ready to start his own practice. Since he grew up watching his parents operate their own successful family business, he knows that tracking his cash flow will help him stay afloat in the early years, as he adjusts for how long it takes health insurance companies to pay claims, and decides what his staffing needs might be. Many banks, including PNC, offer business owners like Pat the tools they need to help track and optimize cash flow. Taking advantage of these tools can help Pat plan for the future, which for him is just next month.
PROFIT AND LOSS STATEMENT
If you think you’re too small to worry about your “P&L”, think again. This financial statement breaks down your sales, costs and expenses within a certain period of time, like quarterly or annually. While the balance sheet shows what you own and owe at a specific point in time, the P&L statement reveals trends in your financial situation over time.
Why It Matters
Bryce started selling unique screen printed t-shirts online and quickly discovered that retail can be feast or famine. He uses his P&L statement to identify peak times and slow periods so he has the right amount of inventory at the right time. If he chooses to grow his business in the future, he can share his P&L statement with his banker, who can help him apply for a loan that covers related expenses, like new screen printing equipment or a new facility.
Here comes another equation:
Why it Matters
Some startups have greater working capital needs than others. Stephanie is a self-employed graphic designer with consistent year-round work and no employees. She’s happy with her current situation and has no plans to grow – she simply needs enough working capital to pay her bills on time. Paul, a metal fabricator selling into cyclical industrial markets, needs enough working capital to buy raw materials and pay employees during slow times. He also plans to double the size of his business in the next three years and he knows the old saying – it takes money to make money.
For more information on managing your business finances and what banking solutions are available to help, stop in your nearest PNC branch, or call PNC 1-877-287-2654 to schedule time with a Business Banker.
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