Whether you’re starting or running a small business, sometimes it makes sense to get back to basics—especially when it comes to small business finances. That’s why we’ve put together this simple guide of the terms you need to know, along with an explanation of some of the core principles for successfully managing the finances of your new enterprise.

Let’s start with a glossary of the terms you need to know.

Calendar Year and Fiscal Year

A calendar year runs from January 1 to December 31 each year. A fiscal year is a one year period that a business or other organization uses for accounting, financial, budgeting, and taxation purposes. A fiscal year can be different from a calendar year, but many businesses choose to have their fiscal year run from 1 January to 31 December.

Small Business Assets

An asset is something your small business owns that is expected to provide a future benefit or value. Assets are reported on a business balance sheet, and may be subject to depreciation for tax purposes. For example, if you purchase a vehicle to run your business, that would be considered an asset.

Small Business Liabilities and Debts

A liability is an obligation to an individual or business, including debts and loans, that your business has not yet repaid in full. If a liability will exist for 12 months or fewer, it’s a short-term liability. Anything longer is a long-term one. Liabilities are reported on your business balance sheet. For example, if you take out a business loan to purchase a vehicle, that would be a liability.

Small Business Equity

The equity in your small business is the total value of your assets, less the cost of your liabilities. The original funds you or others put into the business to start it, counts toward your equity. Equity is reported on your business balance sheet. For example, if your business has assets of $50,000, and debts of $10,000, your equity would be $40,000.

Small Business Revenue

Your revenue is the total amount of money your business takes in, normally from making sales of products and services. Your business revenue is shown on your profit and loss report. For example, if you sell $150,000 worth of goods in a year, then that would be your revenue.

Small Business Expenses

Your expenses are the costs your business pays as part of the process of doing business. These expenses are normally deductible as a tax expense. Your expenses are shown on your profit and loss report. For example, if you have costs of $50,000 to buy inventory, and $20,000 for other costs, your expenses would be $70,000.

Small Business Profits

Your profits are what’s left when you deduct your expenses from your revenue. Your profits (or losses) are shown on your profit and loss report. For example, if you have $150,000 in revenue, and $70,000 in expenses, your profit would be $80,000.

Small Business Taxes

You or your business will need to pay taxes on profits. Most businesses are “pass-through” entities, which means money earned by the business is reported and taxed on your personal tax return. In addition to your personal tax return, certain types of businesses (including partnerships and S-Corporations) must file additional forms with the IRS. 

Small Business Depreciation

If you purchase an asset like computer hardware, furniture, vehicles, or other equipment, you may not be able to deduct all of the expenses from your tax in one year. Instead, you need to depreciate the asset, writing off its value over its “useful life,” which may be three, five, or seven years. Speak to your accountant to find out more.

Small Business Balance Sheet

A balance sheet is a report that states your business assets, liabilities, equity, and other information at a specific point in time.

Small Business Profit and Loss Report

A P&L report details the revenue, expenses, and profits (or losses) in your business. It typically categorizes revenue and expenses into certain categories so you can understand where you are receiving and spending money.

Managing Your Basic Business Finances

There are a few fundamental financial principles you need to follow to keep your business stable and successful.

Understand Exactly Where Your Business is Spending Money

Keeping a tight rein on your expenses is vital. As soon as your business starts, be sure to capture exactly where you’re spending money and categorize it so you can understand your main costs. This will help you put proper controls in place if any expenses are getting out of hand. It will also help when you are calculating profit margins.

Figure Out the Cost of Selling Goods and Services and Price for Profit

It makes sense that you need to sell products and services for more than it costs you to produce them, but it’s vital you figure in all costs. Any expense made by your business has to be covered by your selling prices. You will need to take into account:

• The costs of procurement and providing items, including how much it costs you to source, manufacture, and gets goods to your business.
• The costs of preparing, packaging, and distributing items, including logistics and mailing expenses.
• Payroll and salary expenses for your employees.
• Costs required to operate your business, like rent, utilities, assets, equipment, and similar.

Once you understand the costs associated with providing each item, you can set your selling prices to cover your costs and generate a profit. 

Keep a Cash Buffer in Your Business

Unexpected circumstances are expected in business. These can drain your financial resources, so it’s important to keep cash in the business so you can ride out difficult times. Ideally, you should keep enough money on hand to meet your expense needs for three to six months. 

We hope you’ve found this guide to business finances useful. Remember that every individual and business situation is different, so always speak to a qualified accountant for advice for your circumstances and ask the right questions.