Keeping close track of your small business’ financial status is a key component of success.

By Henry Brown

Small businesses don’t have it so easy when it comes to funding. Having the money to do what they need to get done is tricky. It often stems from a misunderstanding of several financial factors.

Here are the key concepts and problems you need to understand when assessing the financial health of your business.

Understanding the black

We often use the term “black” to mean negative things. But in the world of business and finance, being “in the black” is a good thing. If a business is in the black, it means that your finances are in a positive state. If you’re making more money than you’re spending (i.e. making a profit), then you’re in the black. (You also have to be making more than you’re expecting to spend.) If the money you’re bringing in is less than that, then you’re said to be operating in the red.

Assets and liabilities

Another way of putting it is that you have more assets than liabilities. Examples of business assets include lands, buildings, stock, equipment – and, of course, cash. Money that you expect to be paid by customers or other businesses can also be considered assets. Liabilities include long-term debts, accounts that haven’t been paid, and accrued expenses.

So if you’re in the red, you have more liabilities than assets. This isn’t a position any business wants to be in. But it’s an alarmingly common one for small businesses.

Are liabilities avoidable?

The vast majority of businesses have accrued some form of debt when starting up. This isn’t necessarily something every business should avoid. This is one of the dangers about presenting assets and liabilities as binary, one as good and one as evil. The fact is that liabilities are often something you can’t avoid. In fact, getting into the black might require you to take some on.

When a business is facing a funding problem, it can often seem like the worst time to take on more liability. And by “liability,” I refer, of course, to debt. But if your problem is a lack of profits, then you may need to think about a company restructure. This can help you increase sales, rethink business practices, and enter new markets. Of course, a company restructure takes money. So you may need to look into a simple business loan to help you get yourself back on track.

A focus on financial management

One of the harsh truths about this subject is that these problems are often caused by poor financial management. And when I say this, I’m referring specifically to the people employed to manage the company’s finances. A lot of startups don’t invest much in expertise in this area. They get a recent finance or accounting graduate. The business owner may even try to do it themselves. But this just makes it more likely that mistakes will occur.

It’s absolutely vital you hire someone who knows about the intricacies of financial control. They need to understand debt to equity ratio control. They need to be able to draft strong financial plans. They also need to know when to raise the alarm, so problems don’t make themselves apparent too late.

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Henry Brown is an online marketing executive. When he isn’t talking shop he’s roaming the streets of London, uncovering the extra-ordinary in the ordinary.