ebook

A guide to small
business finance
Understanding small business
financial management
Contents
Understanding Financial Statements 3

What is an Income Statement? 3

What is a Balance Sheet? 3

What is a Cash Flow Statement? 3

Accounting Formulas You Should Know 4

Benefits of Accounting Software vs Spreadsheets 6

Simple to use and get started 6

Save time with automation 6

Get paid faster 6

Cloud software = Always up to date with anytime access 6

Conquer year-end 6

Automate Your Small Business Finances with Sage 7

Sage Business Cloud Accounting 7

AutoEntry 7

Stripe 7

A guide to small business finance 2

Understanding
Financial Statements

With so many things to juggle in a small business, it is all too easy to be immersed in
your day-to-day operations and neglect the big picture. As you plan for one year, five
years, or even a decade from now, it is important to keep up with your finances.
Most small business owners are not accountants. And many small businesses don’t
know which product or service makes the most profit. As a small business owner, it is
crucial to understand your financials so you’re aware of how your business is doing at
any given time.
At a high level, your financials refer to reports and statements that offer insights into
the financial health of your small business. In this guide, we will cover the Income
Statement, Balance Sheet, and Cash Flow Statement as well as the key accounting
formulas to help you evaluate your key performance indicators (KPIs).

What is an Income Statement? What is a Cash Flow Statement?

A business’s performance is reflected in the Income To have enough cash available to run the day-to-
Statement, also known as a profit and loss (P&L) day business operations and cover any unexpected
statement. The statement includes business expenses, you will need to forecast and plan for
income, operating costs, and expenses used to cash coming in and going out of your business as
calculate total business profit or loss for a specified accurately as possible.
financial period.
The Cash Flow Statement summarizes the amount
P&L statements help you manage your business of cash your business takes in, the sources of cash,
better and keep your financials on track. A monthly the amount of cash that goes out, and how cash
statement monitors the performance of your is used. Think of the Cash Flow Statement as the
business against stated projections—reflecting bridge between the Income Statement and the
a profit, loss, or break-even situation. If the P&L Balance Sheet.
identifies problems, you will have a chance to
correct them before anything gets out of hand.
In addition to these three main financial statements,
What is a Balance Sheet? other reports – such as a sales report or an accounts
While producing positive net income is a critical first receivable aging report – can add tremendous value
step, it doesn’t tell the full story. The Balance Sheet, and help you better understand the financial health
sometimes referred to as a statement of financial of your business. It’s important to have accurate and
position, essentially identifies your company’s net timely financial statements that are customized to
worth. suit your business so you can spot problems early
and enhance your decision making.
On a Balance Sheet you will list out what your
business owns (assets) and how much it owes
(liabilities) to determine your Return on Assets
(ROA). Your ROA is a key indicator of your company’s
ability to generate future revenues.

A guide to small business finance 3

Accounting Formulas
You Should Know
The data that goes into your financial statements are calculated from your business
metrics, such as total sales and monthly expenses. To understand if those numbers are
healthy, there are several accounting formulas that analyze your business performance.
Below are the ones to become familiar with.

Formula Calculation Explanation

AR Days Sales Days Sales Outstanding = This is a measure that indicates how much a given
Outstanding (Avg. Accounts Receivable period’s sales are uncollected at a given point in
Balance / Sales) * 365 time. This measure should be as small as possible for
a successfully growing business.

Break-even point Break-even point = Your break-even point for your goods or services
Sales – Costs = $0 profit lets you know when a sale covers the full cost,
both fixed and variable, to deliver a good or service.
This calculation can help you manage costs and
determine a sales price that will ensure a profit.

Current Ratio Current Ratio = Current This is a balance sheet measurement that also seeks
Assets/Current Liabilities to measure your ability to cover current obligations
with current assets. It includes inventory that
generally takes longer to convert to cash.

A strong ratio is 2 or above.

Debt-to-Equity Debt-to-Equity Ratio = This is an indicator of a company’s ability to borrow.

Ratio Debt / Owner’s Equity It tells a bank how much external debt a business
has in relation to the owner’s own investment
(represented by balance sheet equity or net worth).

For most industries, a banker will not loan funds to

a business with a Debt-to-Equity ratio that is higher
than 2.

Gross Margin Gross Margin = This is a critical first measure of success and
Gross Profit / Sales indicates the percentage of direct profit you are
generating on sales of goods or services.

Your Gross Margin enables you to see if you are

generating sufficient returns on your goods and
services.

A guide to small business finance 4

Formula Calculation Explanation
Inventory Days Inventory Days Outstanding= This is a measure of the amount of inventory (in
Outstanding (Inventory / Cost of Goods dollars) you have accumulated in relation to the cost
Sold)*365 of items sold during a period.

You want this number to be as low as possible,

indicating your ability to produce maximum sales
from minimal inventory investments.

Inventory Inventory Turnover = Cost of Inventory Turnover is another way to measure

Turnover Goods Sold/Inventory on Hand operational efficiency in managing inventory.

This is the inverse of the previous inventory measure

and can be calculated for individual items on hand.
It is designed to indicate which items are moving
most rapidly, helping you determine which items to
re-stock.

You want this number to be as high as possible for

each item in inventory.

Net profit Net profit = Sales – Expenses Net profit, sometimes referred to as the bottom
line or net income, is the amount left over after
all expenses, including the cost of goods sold,
operating expenses, and debt, have been accounted
for.

Net profit margin Net profit margin = While knowing you net profit is important, your
Net profit / Sales net profit margin is a stronger indicator of your
business’s financial health.

If you profit margin is slim or doesn’t improve over

time, it may be time to re-evaluate your pricing or
change your service or product offerings.

Return on Assets Return on Assets = The ratio gives you an indication of how efficiently
Net Income/ Total Assets your assets are being used to generate profits.

A guide to small business finance 5

Benefits of Accounting
Software vs Spreadsheets

It is not uncommon for a small business owner 3. Get paid faster

to start tracking their business finances with a
Speaking of invoices, approximately 30% of small
spreadsheet. Or perhaps more accurately, a series
businesses experience problems from past due
of spreadsheets.
invoices, resulting in businesses spending an
However, as your finances become more complex, average of 130 hours chasing late payments1. That’s
you’ll quickly discover spreadsheets don’t grow well valuable time you could be spending on growing
with your business. In a spreadsheet every financial your business.
transaction, such as a payment arriving in your bank
Accounting software helps you speed up your
account, must be manually updated. This not only
invoicing process by enabling you to create, edit,
takes up time, it also increases the likelihood of data
send, and track your invoices from anywhere, at any
errors. Manual data entry also means you lack a
time. Your customers receive automatic reminders
real-time view of your business finances.
of their payment due date and can pay you online,
Fortunately, you can mitigate these challenges by directly from the invoice.
automating your finances with cloud accounting
software like Sage Accounting. Here are some 4. Cloud software = Real-time data with
key benefits to using accounting software in your anywhere, anytime access
business. With cloud accounting software you can view,
update, and manage your accounts from any
location, at any time. Your data is securely stored in
1. Simple to use and get started the cloud, so you can get accurate real-time insights
If you can use a spreadsheet you can use into your company’s finances when you need it.
accounting software. Modern small business Accounting software also makes it easier to share
accounting software is quick to set-up and offers a information with your accountant, bookkeeper, or
user-friendly design. Accounting software is more team.
than just a tool to record transactions, it lets you
visually see how much money is coming in and
5. Conquer year-end
out of your business each month with automated
As a small business owner, it’s likely the two times
dashboards. In addition, with accounting software
of year that you will talk to your accountant or
like Sage Accounting, you can generate your
bookkeeper the most are tax season and year-end.
financial statements with a few easy clicks.
Using cloud accounting software helps to ensure all
your invoices, receipts, and statements are neatly
2. Save time with automation filed and easily accessible to your accountant or
Accounting software lets you reduce the time bookkeeper.
you spend on paperwork by automating common
accounting tasks. You can connect to your bank
account, for example, so incoming payments can
be matched to invoices in minutes. You can also
save time by setting up your invoices to recur
automatically.

1 The Domino Effect: The impact of late payments: https://www.sage.com/en-us/blog/wp-content/uploads/sites/2/2017/12/Domino-Effect-

Late-Payments-Research-Sage.pdf

A guide to small business finance 6

Ready to automate your
small business finances
with Sage?
Discover the solutions that will help you automate
your finances so you can reduce admin, get paid
faster, and spend more time on your business.
Sage Business Cloud Accounting
You’re a small business with big goals. Sage Accounting can help you reach
them with time-saving automation for invoicing, expense and payment tracking,
and data entry. With your data stored securely in the cloud, you can monitor,
manage, and grow your business from anywhere.

AutoEntry
You’re a small business with big goals. Sage Accounting can help you reach them
with time-saving As a small business owner your time is valuable. AutoEntry
alleviates hours of work, automating burdensome tasks and cutting down on
manual data entry mistakes. With AutoEntry you can capture your receipts with
your mobile device and sync the data automatically to Sage Accounting. Saving
you time and reducing data entry errors so you can focus on your business.

Stripe
No more chasing late payments. Sage Accounting works effortlessly with
Stripe to give your customers a simple and secure way to pay you directly from
an invoice. From invoice tracking to payment processing – it’s all taken care
of automatically so you can better manage your cash flow and focus on your
valuable customer relationships.

Visit www.sage.com to start your free trial today.

A guide to small business finance 7

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