Small Business Finances Made Easy

Small Business Finances Made Easy


Do you ever feel like maybe you are the only business owner who is not fluent in financial statements? Rest assured, you are NOT alone. In fact, most of us who come into owning our own businesses feel like we are the ONLY ones who don’t get this stuff.

After many years of working with thousands of Small Businesses, I have noticed that finance is often an area of weakness for small business owners.
The myth about understanding finances is that it is difficult, that only people with extensive formal studies in accounting, finance and management can understand finance well. This myth came about because most people who learn finances do so in college or technical schools, and most of these schools prepare their students to work in the financial departments of large companies, not to manage the finances of a Small Business. Unfortunately, trying to adapt best business practices of large companies to a small business almost always results in failure.

Reviewing your finances without understanding what they mean is like driving a car without knowing what the car dashboard indicators mean. Imagine that the oil change indicator lights up and you don’t know what it means, so you continue driving the car. Eventually, your motor burns out and your car stops running! The results can be just as bad when small business owners and entrepreneurs misunderstand their financial statements.

To understand finance you only need to know how to do 4 things: add, subtract, multiply and divide. That’s all, you do not need more! Below is a simple explanation of the 3 critical financial statements.

Be aware that even if your accountant or bookkeeper prepares your statements for you, the best situation is for you to work in partnership with your accountant. Discuss with your accountant how you want your financial statements presented, what level of breakdown you want to see, how much detail, in what format, etc. This will be critical to your understanding of what is happening in your business.

Here are the 3 critical financial statements:

1. Income statement:

This statement tells us how much the company earned, how much was spent and how much remained.

It’s simple: revenues – costs – expenses = profit.

In a more common format:

Sales – Cost of sales = Gross margin

Gross Margin – Expenses = EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

EBITDA – interest and depreciation = Profit before taxes

Profit Before Taxes – taxes = NET profit

2. Balance Sheet:

This statement shows your assets, liabilities and shareholder’s equity (net worth). In other words, how much I have, how much I owe and how much wealth the company has generated.
The balance sheet will always “balance,” since Assets = Liabilities + Equity. If your assets are greater than your liabilities, then you will have positive shareholder’s equity. If your liabilities are greater than your assets, you will have negative shareholder’s equity.

3. Cash flow:

Cash is the lifeblood of any business. Without cash, you cannot operate. While your accountant or bookkeeper can provide you with monthly statements, this is the one statement that I recommend you maintain yourself, within your business. Keep an excel spreadsheet that keeps track of the cash flowing in and out of your business. You do not want to find out too late that you don’t have the cash to pay your bills or your payroll.

Just because your “sales” are high, do not assume you are in a good cash position. If your receivables are very high, you might have a situation where your customers all owe you a lot of money, and you don’t have enough cash to pay your bills! If this is perpetually the case, it would be a red flag to review your customer payment policies.

Remember, no one is born understanding finance. Like everything in life, we need to learn it, and then practice it to truly understand the “language of business.” The more you review your financial statements, the better and better you will understand them.

Guest Post by Rodrigo Laddaga:

Rodrigo Laddaga is an entrepreneur, small business advisor and strategist based in Mexico. After building and selling his first multi-million dollar business to a major corporation, he discovered his passion for helping other small business owners to do the same. Rodrigo’s consulting company delivers the best of the best business growth systems to the Spanish speaking business community.

Rodrigo Laddaga es un emprendedor, asesor y estratega de PYMES (Pequeñas y Medianas Empresas) con base en México. Después de crear, desarrollar y vender su primera empresa que llegó a facturar USD 33 millones anuales tan solo 7 años después de ser iniciada, Rodrigo descubrió su verdadera pasión por ayudar a otras PYMES y Emprendedores a profesionalizarse y ser exitosos. Rodrigo junto con su empresa y sus socios, introducen al mercado Mexicano y de habla hispana los mejores programas y metodologías a nivel mundial para PYMES y Emprendedores. Actualmente cuentan con 2 programas ancla, EMyth ( y los programas que Provendus Group a comenzado a desarrollar y difundir en el mundo.

About The Author

Dr. Sabrina Starling, The Business Psychologist and international best-selling author of the How to Hire the Best series and The 4 Week Vacation™, is the founder of Tap the Potential and host of the Profit by Design podcast. At Tap the Potential, we work to free business owners from the constant demands of a growing business.

We believe work supports life, not the other way around. Clients in our Better Business, Better Life coaching program have more time for what matters most and more money in their bank account than they’ve ever had. Next, we send them off on a 4 Week Vacation™ to celebrate their hard-earned journey to take their life back!

Dr. Sabrina and her team at Tap the Potential are on a mission to change the story of entrepreneurship from one of long hours, grinding it out, to one of sustainably profitable businesses that support and enhance life. The Tap the Potential Solution™ and our Tap the Potential Family of Business Owners are disrupting small business as usual. We are on our way to making the Tap the Potential Solution™ the mainstream model for growing business.

By 2023, 150 Tap the Potential clients will have taken 4 Week Vacations. These are the trailblazers, role modeling what’s possible for entrepreneurs. In many entrepreneurial circles, it is becoming more and more common for one entrepreneur to ask another, “Have you taken a 4 Week Vacation™?” (as opposed to asking “How many employees do you have?” or “What is your annual revenue?”). Taking a fully unplugged 4 Week Vacation is rapidly becoming the recognized symbol of entrepreneurial success.

Never one to accept the status quo or back down from a challenge, Dr. Sabrina’s How to Hire the Best series grew from her desire to solve the toughest hiring challenges interfering with her clients’ growth and profitability. What sprang from her experience working with entrepreneurs in rural areas catapulted her into becoming the world’s leading expert in attracting top talent in small businesses—no matter what hiring challenges those businesses are facing—and earned Tap the Potential’s reputation as the go-to resource for entrepreneurs committed to creating Great Places to Work with thriving coaching cultures and highly engaged team members working from strengths.

As The Business Psychologist, and with her years of driving profit in small businesses, Dr. Sabrina knows what it takes to find, keep, and motivate exceptional performance out of your biggest investment—team members.