A Citibank® Resource for Your Business
Financial management essentials
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Some entrepreneurs are wizards at finance, accounting, cash management,
and all the other financial skills. Of course, that’s an advantage. But even
if you’re not a wizard, it’s important to understand the basics of financial
management, which can determine the short-term and long-term success
of your company.
In this article, we’ll look at the fundamentals of financial management,
and how they can help you measure the overall health of your business.
And, we’ll discuss the importance of seeking qualified professional
assistance with your company’s financial and legal foundation.
A balancing act
Think of your business as a balancing act. Your goal as a business owner is to keep
three elements — products/services, expenses, and income — in balance. As the weight
shifts in one area of your business, so do the financial management resources you may
need to use. Financial management resources help you gather, record, and analyze
your business’ financial data. And, they give you the information to maintain your
balance in an ever changing business climate.
Three important financial reports
There are three basic financial reports that can help your business maintain its balance:
1. Income Statement (Profit and Loss Statement): Reports revenue and expenses
over a period of time.
2.Cash Flow Statement: Reports the exchange of cash between a company
and the outside world over a period of time.
3.Balance Sheet: Reports a company’s assets and liabilities at a fixed point in time.
These reports allow you to record data and provide the numbers that help you make
investment, credit, and resource allocation decisions. Let’s look more closely at each one.
A balancing act
Three important
financial reports
Choosing the right
financial management team
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1. Income Statement (Profit and Loss Statement):
Helps you see where the money goes.
An Income Statement, also called a Profit and Loss Statement, shows where and
how money goes in an out of a company for a period of time. Monthly, quarterly, and
annual profit and loss reports show the strength of a business.
The format of the Income Statement may vary, but all include the following:
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•
•
•
Revenue (income from normal business activities)
Gross gains (earnings before taxes, expenses, etc.)
Operating expenses and losses
Net income (positive)/net loss (negative)
To understand how Income Statements are set up, think of them as a set of stairs.
You start at the top with the total amount of sales made during the accounting period.
Then you go down, one step at a time.
Continued
Financial management essentials
At each step, you make a deduction for certain
costs or other operating expenses associated with
earning the revenue. At the bottom of the stairs,
after deducting all of the expenses, you learn how
much the company actually earned or lost during
the accounting period. People often call this
“the bottom line.”
If cash flow is positive, you may decide to:
• Reduce prices to increase volume;
• Consider investing “extra” funds;
• Plan for expansion;
• Pay back loans; or
• Hire more staff; increase compensation to
employees.
2.The Cash Flow Statement:
Tracks the lifeblood of your business: cash.
A Cash Flow Statement shows how cash is moving
into and out of the business. It is one of the most useful
financial management tools because it shows you:
• Net cash flow from operating activities —
collections from customers, cash paid to suppliers
and employers, cash paid for interest and taxes,
cash revenue from dividends or interest.
• Net cash flow from investing — purchases or sale
of equipment.
3.The Balance Sheet:
Provides a financial snapshot of your business.
A Balance Sheet is a financial snapshot of your
business. It shows the overall financial condition of
your company, including all the major assets and
liabilities, as well as net worth, which are referred to
as equity.
The “assets” side of the Balance Sheet may include:
• Cash — Currency, coins, checking accounts,
undeposited checks, etc.
• Net cash flow from financing activities — funds
available from sales of stock, loan proceeds,
both principal and interest received on loans
made to others.
• Investments — An asset that can and may be sold
in the near future.
• Net change in cash and marketable securities —
if the cash flow is positive, the business is
generating the cash you need for ongoing
operations, with some cash left over; if the cash
flow is negative, the business needs to raise
more cash through the sale of stock, new loan
proceeds, or other strategies.
• Accounts receivable — A current asset resulting
from selling goods or services on credit.
• Inventory — The value of a merchandiser’s
products waiting to be sold.
• Prepaid Expenses — The value of business
expenses paid in advance, such as insurance
premiums.
Putting your Cash Flow Statements to Work.
• Land — The value of real property excluding the
value of constructed assets.
Cash Flow Statements can help you decide on
business strategies. Let’s take a look at a few
scenarios:
• Buildings — The value of a building excluding the
cost of land.
If cash flow is negative, you may decide to:
•
•
•
•
•
Increase sales;
Be more aggressive in collecting invoices;
Slow spending; delay major new purchases;
See if there’s a seasonal pattern; or
Reduce draw or cut payroll.
• Intangibles — Copyrights, patents, goodwill, trade
names, trademarks, mail lists, etc.
• Other assets — Long-term assets that don’t fit
any of the categories listed above.
Continued
Income Statement vs. Cash Flow Statement
It’s important to note the difference between the Income Statement and the Cash Flow Statement.
Because the Income Statement is prepared under the accrual basis of accounting, the revenues
reported may not have been collected. Similarly, the expenses reported on the Income Statement
might not have been paid.
The Cash Flow Statement already has integrated all that information. It reports the revenues that
have been collected and the expenses that have been paid for a period of time. Therefore, business
people and investors may prefer to utilize the Cash Flow Statement rather than the Income Statement.
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Financial management essentials
The “liabilities” side of the Balance Sheet may
include:
• Short-term notes — A loan to be repaid in less
than a year.
Choosing the right financial
management team
• Accounts payable — The amount owed for items
or services purchased on credit.
Unless you’re a trained financial or legal professional,
setting up and maintaining your general ledger, business
tax forms, and legal documents can take a great deal
of time. And, that can mean less time for what you do
best — sales, customer service, and the development
of new products and services.
• Accrued expenses — An expense that has been
incurred but not yet paid.
Therefore, the money required to acquire professional
advice could be money very well spent.
• Taxes payable — The amount of taxes currently
due to the federal, state, and local governments.
But the help you get from your financial management
team is only as good as the professionals you choose.
So focus on selecting a team that has a track record
with other businesses like yours – and that works well
with you.
• Long-term debt — Obligations that are not
payable within one year.
• Other current liabilities — Obligations that are
due within one year.
• Bonds payable — The face amount, par amount, or
maturity amount of bonds issued by a company.
If the company is a corporation, the third section of
the Balance Sheet is Stockholders’ equity. (If it is a sole
proprietorship, it is referred to as Owner’s equity.)
The “equity” side of the Balance Sheet may include:
• Stockholders’ equity — The difference between
asset amounts and liability amounts.
• Common stock — If a corporation has issued
only one type, or class, of stock, it will be
common stock.
• Paid-in capital — The amount paid or contributed
by stockholders in exchange for stock.
• Retained earnings — Cumulative earnings that
have not been distributed to stockholders.
Take control
Financial management empowers you to make wise
business decisions. And, it is vital to your ability to
create and file accurate and complete financial reports.
So take the time to get familiar with the fundamentals of
business finance, and make them work for your business.
You’ll find that financial management is a skill that will
serve you well for as long as you operate your business.
Talk to Citibank
Your Citibank Business Specialist can help you select
the appropriate banking services for your business—
while providing advice based on experience with other
businesses like yours.
© 2011 Citigroup Inc. Citibank, N.A. Member FDIC. Citi and Citibank with Arc Design are registered service marks of Citigroup Inc.
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