When you start a business, the first big headache is usually that the numbers add up at the end of the month. Financial management comes into play, the instrument that allows you to know the solvency of a company. That must be controlled from the first moment, as it will be one of the indicators that will give you information on whether you are on the right track. If you are an entrepreneur, you will be the one in charge of this department.
For this reason, you will be an investor, an accountant, a product developer, and a salesperson in the first steps of a business. Ultimately, you will be your own business.
Next, I will give you a series of fundamental concepts to familiarize yourself with the subject and five tips that will guide you.
First of all, I will try to define for you what finances are, as it is not just about passing bills. Finances are a branch of economics that studies the exchange of various capital goods among individuals, companies, and institutions. That is, they are in charge of money management. An entrepreneur must make fundamental decisions for the viability of his business, such as: how much money to invest, where to allocate that investment, or how do I obtain the necessary financial resources.
Table of Contents
These are the fundamental concepts of financial management:
Cash flows
It collects the receipts and payments of the company, in other words, the money movements. It determines its ability to generate the cash that allows it to meet its obligations and expansion projects.
Profit and loss or profit and loss account
Reports on the financial situation of the company as a result of ordinary operations. It is obtained by subtracting expenses from income, and the product can be profits or losses.
Ebitda
A financial indicator comes from the acronym of English Earnings Before Interest, Taxes, Depreciation, and Amortization, which means Profit before Interest, Taxes, Depreciation, and Amortization. It is used as an indicator of business profitability.
Assets
All assets and rights belong to the company, for example, cash, accounts receivable, furniture, machinery, etc.
Passives
All company debts and obligations, such as payroll, taxes payable, bank credits, etc.
Net worth
The value of a business when debts are discounted. It is calculated by subtracting the liability due from the asset.
Stockholders’ equity
The initial amount of money that the owner or partners of the SME contributed plus the benefits that the company generated and have not been withdrawn.
To interpret these data and apply them to your business, you must use the balance sheet, an accounting statement that presents the financial situation of a company at a specific date; that is, it tells us what resources the company has (assets), how much money we owe ( liabilities) and what capital we have at that specific moment. It is the financial statement par excellence.
Having reliable and up-to-date financial information can be the difference between making a good decision and a wrong decision. SMEs are more vulnerable to financial errors and omissions because they do not have support resources or cash reserves.
In summary, finances are a fundamental part of the growth and development of SMEs; what’s more, you may have a super business idea, but if you can’t balance your accounts, you will have little time to live.