Author: Cassie Gasaway
Yes, it’s the busy season, but you should never be too busy to evaluate the health and well-being of your business finances. Your family and your employees rely on you to know, understand and assess numbers to make sound business decisions. Financial mistakes and misunderstandings can have devastating consequences. Review these terms so you can be confident your business is financially stable.
To define and decipher confusing finance terms, we spoke to three experts on the FORVIS (formerly BKD CPAs & Advisors) MyATA service provider team, including:
- Nathan Fitzgerald, director in tax and outsource accounting services
- Dakota Comer, senior associate
- Rane Bateman, outsourcing associate
Let’s see what they had to say.
Terms to Know and Understand
- Profitability (Net Income) Versus Cash Flow
Fitzgerald said new business owners are often unfamiliar with these terms, and veterans can sometimes confuse them. In short, net income is the total profitability of your business. It’s the result of revenues minus expenses, taxes and costs of goods sold. You can determine net income through profit and loss statements. However, not everything that costs money is factored into your net income on the P&L statement. That’s why it’s important to understand cash flow, which is the amount of operating cash that flows through the business. It refers to the cash generated from revenues. Business owners must understand how cash flow differs during slow and busy seasons so they can plan business expenses throughout the year accordingly. For instance, Fitzgerald encourages ATA members to think about bank debt or capital improvements.
“Those things will be assets or liabilities that we’re taking care of with our cash flow but not directly impacting our net income,” he said. “We can be profitable but not feel like we’re growing from a cash perspective. The distinction between those two things is critical for a new operator.”
Determine whether you're using the cash basis method or actual basis method of accounting. Photo Credit: ATA
- Accounting Methods: Cash Basis Versus Accrual Basis
Business owners can take one of two approaches when recording and maintaining financial transactions. Comer said the cash basis method records sales when you receive cash from the customer and expenses when you pay the vendor. The accrual basis looks more at the substance of the transaction. It records income when it’s actually earned and expenses when they actually occur, not when the cash is paid. Business owners will use terms like accounts payable (money owed to vendors) and accounts receivable (money owed to your business, typically received from customers) in the accrual basis of accounting. FORVIS encourages all businesses to operate on the accrual basis, but Fitzgerald said manufacturers might use the cash basis approach for tax purposes.
- Profit Versus Profit Margin
Profit is the difference between an amount you earn and what you spend buying, operating, marketing and producing something. In short, it’s money you keep or invest after paying your bills. Profit margin is the ratio of a company’s profit to revenue. Profit is measured in dollars, and profit margin is measured as a percentage. To make a profit, your margin must be more than what you paid for the product and overhead expenses (including things like insurance, rent, utilities, maintenance repairs and office supplies). To learn more about profit margins, read ATA’s article “ATA Business School: Profit Margins 101 (Part 1).”
- Financial Adviser Versus an Accountant
Lastly, Fitzgerald said there’s a distinction between a financial adviser and an accountant. Typically, a financial adviser helps businesses develop investment portfolios and plan for the future. In contrast, an accountant helps business owners determine financial goals and objectives while reviewing the business finances to help owners evaluate them and achieve those goals. If you’re looking for financial help, search for the right person. Better yet, find someone who’s also knowledgeable about the industry.
View the Small Business Administration’s glossary of business financial terms for a full list of financial terms and definitions.
Get a Pulse on Your Business with Financial Formulas
Once you understand basic financial terms and processes, you can input numbers into equations to determine your business’s overall health. The FORVIS team said no single metric drives everything, and different businesses will use different formulas. They created a quick cheat sheet to help ATA members apply and analyze their business numbers.
View the Financial Terms and Calculations document to learn more.
Calculating the inventory turnover rate (how often you see through stocked product – the higher the better), amount sold per ticket (how much the average customer spends each visit) and the breakeven point or analysis (how much you need to make considering all factors to break even) are important metrics to consider so you can get a pulse on your business and make better decisions.
Whether you’re a new or longtime business owner, it’s best to use software programs and financial resources to ensure your accounting efforts are as accurate as possible.
Fitzgerald said ATA members should use a digital general ledger platform and do away with paper reporting to minimize errors. The best software program to use depends on your business size. For example, most retailers can use QuickBooks, whereas manufacturers would likely use Sage Intact or Microsoft Dynamics. Consider other software programs, including an accounts payable system like Bill.com or a point-of-sales system like Celerant Technology’s Cumulus Always On.
Most business owners will reach a point where they don’t understand some part of their taxes and finances. Comer said that’s where a qualified financial resource comes into play. “It’s smart to outsource at least some of your accounting efforts,” he said. “Many ATA members focus on operational elements of business because that’s where their passion is, and that’s what they’re good at. We’re good with taxes, numbers and accounting. This is our passion.”
Working with a trained financial professional helps you establish confidence and allows you to focus on what you’re good at. Determine your needs and find someone who can meet you where you’re at, whether you need a temporary or constant presence, or someone only at tax time.
The FORVIS team strives to be a helpful resource for ATA members. The MyATA service provider welcomes calls and questions on all accounting matters without upfront fees. If the issue is involved, FORVIS will communicate its fees and rates to you before sharing advice. Please contact Comer (firstname.lastname@example.org) or Bateman (email@example.com) for assistance. Visit the MyATA service provider website to view other companies ready to serve you.