When we engage small business owners in a bankruptcy counseling session we often ask, how much revenue does the business need to simply break even: pay its debts and obligations (including payroll and taxes) as they become due? Often, the owner sitting across from the table from us has no idea how to answer that question.
This Q&A on small business finance should be read by all small business owners who want to succeed financially.
I like to have people focus on a handful of key metrics. Classical accounting goes from the balance sheet to the profit-and-loss statement to the cash-flow statement. I think that’s backwards.
Our process is to have entrepreneurs start with their cash-flow statement. Cash is king in a small business, so this is your most important document. Better still, it looks like your checkbook—or it should—and most people are familiar with balancing a checkbook. It will show you whether, at the end of the month, you have money left over after you pay your bills.
We also tell people to focus on their growth rates, which they can pull out of their income statements. Look at your revenues and your expenses from one period to another. If your revenues are growing by 4 percent but expenses are growing by 10 percent, there’s a problem.
Bankruptcy lawyers who can relate as small business owners
In my role as a bankruptcy attorney, assisting clients with their business needs, and running this law firm as its managing partner, I have a profound appreciation for the importance of understanding cash flow. That said, I can relate to the need for on-the-job financial training; I’m an English major who took NO accounting, finance, or other business-related courses in college, and I went straight to law school upon graduation.
If your business is struggling financially and you do not understand what is required to turn the tide, consult qualified advisers, including a bankruptcy attorney.