Wednesday, February 13, 2008

Finance Basics and Taxes

I'm always amazed when I work with entrepreneurs who don't understand the financial side of their businesses. They have great ideas. They have the moxie and energy to go out and just get things done, but they either have no idea how to manage their cash flow or they don't know the difference between revenue, income and cash flow.

Here's a little advice. If you're going to run a business, keep a record of every check you write, every bill you pay electronically and every credit card purchase you make. You can do this with paper and pencil or on Excel or some other financial software.

When you book a sale, write it down. Write down when you expect to be paid, and then, when the cash comes in, you should record that revenue. That way, you have the ability to know what is really going on in your business and whether it is as successful as you want it to be.

It's easiest to keep your books on a cash basis, that is, just keep track of every cent of cash that comes in and flows out. If you want to know more about how to categorize all this, you should look at the IRS's Schedule C. That lists the categories of expenses and can help you keep track in the same way the IRS wants you to make your reports. You can also go to the SBA's site and read about financial statements. This will help you understand the difference between things like inventory, cost of goods sold, gross profit, overhead, EBITDA (or operating profit) and net profit. You can also learn about capital expenditures and how to account for them. Visit these government Web sites to learn more: www.sba.gov and http://www.irs.gov/businesses/index.html

Before you go to an accountant or bookkeeper or purchase a tax package, it's good to understand the basics yourself. I've also written some explanations about all this for classes I've taught. Feel free to contact me, if you'd like personal tutoring or mentoring.

upstartwyn@gmail.com or visit www.upstartbusinessplanning.com.
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