Real-World Finance 101
for Small Business
A few basics and a few things you probably
didn’t know
Agenda
•
•
•
•
•
•
•
•
•
Performance analysis
Accounting vs. Finance
Accounting cycle
Roles
Software
Chart of accounts
Accrual accounting
Management cycle
Financial management
What are your numbers
telling you about your biz?
• Too fast when margins are shrinking
• Too slow when not keeping pace with
markets
• Fat when there is no leverage
• Vulnerable when revenues are erratic
Trends to Watch
Unhealthy
$
Revenue
Healthy
$
Revenue
Expense
Expense
Time 
Time 
Revenue
$
$
Expense
Time 
$
Revenue
Revenue
Expense
Time 
Expense
Time 
Trends to Watch
Unhealthy
Healthy
Industry Benchmark
$
Revenue
Time 
$
Revenue
Industry Benchmark
Time 
Trends to Watch
Unhealthy
$
Revenue
Healthy
$
Revenue
Cash
Cash
Time 
Revenue
$
Cash
Time 
Time 
Revenue
$
Cash
Time 
Trends to Watch
Unhealthy
Healthy
Revenue
Revenue
COGS
$
Overheads
Time 
COGS
Overheads
Time 
COGS
Overheads
Time 
Revenue
$
$
Trends to Watch
Unhealthy
Healthy
Revenue
$
$
Time 
Revenue
Time 
Benchmarks
What we see financially is that…
• Business owners don’t know when they
are off track
• Opportunities go unnoticed
• Markets fluctuate – its hard to ride a
wave when you aren’t looking
Accounting vs. Finance
Accounting
• Looks back
• Tax driven
• Transactions
• Internal data
• Cycles – mo/qtr/yr
Finance
• Looks forward
• Plan driven
• Models / scenarios
• Internal plus external data
• Management cycles
Finance is about combining accounting information
with business intelligence
Accounting Cycle
1. Daily posting
2. Monthly closing
1. Reconciliations (balance against bank
statements)
2. Adjustments (accruals and
3. Reporting
3. Annual closing
Role of Bookkeeper
•
•
•
•
Posting
Reconciliation
Billing
Basic financial reporting
Principle of “Separation of Duties”
One person should not manage the books
and handle receipts and deposits
Accounting Software
Selection Checklist:
Regional leaders:
 Is it easy to use & get help?
 Does it interface with my
operations management
system?
 Association or peer network
preferences
 Cost of systems & ops
 Is there a hosted version?
US and Canada:
1. QuickBooks Pro
2. Microsoft Dynamics
Europe
1. Sage Peachtree
2. MAS
India
1. Tally
Australia and Pacific Rim
1. MYOB
2. Zero
Chart of Accounts & LOBs
Chart of Accounts: The naming convention
for grouping accounting activity.
Lines of Business (LOB): are the tributaries
to group the sources of revenue and
expenses.
Example:
•
Products
•
Services
•
Special projects
Achieve a balance between:
1. Minimal detail for easier management
2. Granular enough for visibility on financial
performance by LOB.
Where is your revenue coming from?
Where is your profit coming from?
Chart of Accounts
Two categories of accounts:
1. Balance Sheet accounts
Running totals; account balances as of
the end of a reporting period.
2. Income Statement accounts
Period activity totals; total amount of
activity during a reporting period.
Chart of Accounts
Balance Sheet
Assets
Current assets
Cash/checking
Accounts receivable
Inventory
Long-term assets
Furniture/equipment
Organization costs
Liabilities
Short-term liabilities
Credit cards
Accounts payable
Long-term liabilities
Long-term loans
Equity
Capital stock
Retained earnings
Assets = Liabilities + Equity
Chart of Accounts
Income Statement
(a.k.a., P&L; profit & loss)
Sales
Cost of goods sold (COGS)
Product costs
Service costs
Gross Profit
(Gross Margin% = gross profit/sales)
Expenses (a.k.a., SG&A, sales, general and admin)
Salaries
Benefits
Incentives / bonuses
Rent
Legal
Operating Income
Other Income
Net Income
Profit% = net income/sales
Principle of Revenue and
Expense Recognition (GAAP)
• Revenue received before it is earned
should be booked as a prepaid asset and
not recognized as income until it has
been earned.
• Expenses owed but not paid should be
recorded as expenses in the period
incurred regardless of when they are
paid
Accrual Accounting
• Accrual-Basis Accounting: revenues and
expenses that have been received and paid in cash
plus revenues and expenses that have been earned
and incurred
• Accounts payable or receivable, depreciation
• Cash-Basis Accounting: revenues and
expenses that have been received and paid in cash
• Cash payments and receipts
Accrual Accounting
Your choices:
A. Accrual Basis
B. Cash Basis
C. Combination
Most small businesses choose “combination”
– Pay taxes based on “Cash Basis”
– Management reporting based on “Accrued
Revenue” and “Cash-based Expenses”
– Financial analysis based on Full Accruals
Adjustments
• Depreciation and amortization
– Recognizing expense in the period where you
use it. Can impact analysis if not reflected.
• Accrued earnings
– e.g. Multi-month projects
• Accrued expenses
– e.g. prepaid software license, contractor
payments
Maybe you didn’t know…
• Balance Sheet doesn’t reveal the market
value of a business
– If you were looking to buy or sell a business, assets
and liabilities don’t tell the story. Value is driven by
trends, future potential, market comparables, ability
to generate “free cash”.
• Income Statement (P&L) does not reveal
where your business is headed
– Trend analysis tells the bigger story
– Performance analysis tells the detailed story
Financial Management
•
•
•
•
•
Business planning
Goal setting
Budgeting
Progress analysis
Communications to management team
– Goals
– Actual performance
– Collaboration on needed improvements
• Monthly, quarterly and annual cycles
Financial Management
Resources
• Professional association standards or
recommendations
• Integrated systems (financial and operations)
• Financial dashboard (“business intelligence”)
• Business advisor / consultant
• Board of directors or advisory board
Performance Analysis
Trends
Ratios
Goals
Benchmarks
Performance Analysis
Combined Business Analysis: growth, profitability
Line of Business (LOB) Analysis: growth, profitability
Services
Product
Sales
Other
Growth
GM
Profitability
Growth
GM
Profitability
Growth
GM
Profitability
KPIs
(key performance indicators)
• Ties operating data to financial data
• Example – product sales and service
– Revenue or Expense per employee
– Quick Ratio (Current Assets / Liabilities)
– Support calls per sale
– etc.
The Process
• Need to do it every month
• Don’t let it take too much time (30 min
monthly management)
• Use analyzed data to find “the big 3
priorities”
• Share with your team – get everyone on
the same page
Getting your Team on the
Same Page
How do you know when
you’ve “got it?”
Checklist for success:
 Taxes submitted on time
(not too much, not too little)





Goals are set & tracked
Routine monitoring
BI shared with team
Course-corrections
Tools to monitor
Long Term Goals
•
•
•
•
•
•
•
Sustainability
Long-term growth
Market position
Owner’s return on investment (ROI)
Equity value
Liquidity event (sell, acquire, investment)
A good night’s sleep
Don’t live on an island!
Free Financial Health Check
Your Company, Inc.
https://healthcheck.corelytics.com/pub/sign_up.aspx