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Small Business Finance – How To Understand Income On The Income Statement

An income statement a.k.a. Profit & Loss, is a summary of income received and expenses reported during a stated period. The periods are usually stated in monthly, quarterly, or annual terms.

A mid-month statement can misrepresent the data. For instance, if your business records most of your sales in the first 7 days of the month but does not record expenses till after the 20th of the month. This mid-month statement will overstate income and understate expenses.

Income can also be called sales or revenue.

Income can be subcategorized by type of sales. For example a fish store could have: Freshwater Fish, Saltwater Fish, Equipment, Tank Supplies, and Food. Breaking down income this way at the end of the period helps the owner look at her Income Statement and know the dollar total of each type of sale. Another tool is to know what percentage of your sales come from new customers versus existing customers.

One common mistake is to track income that is not earned by selling your business’ product or service in the income section of the statement; e.g. sales of assets, loan deposits, or tax refunds. Loan deposits are tracked on the balance sheet. Other income generated from other business activity such as gain on sale of assets and tax refunds is reported at the bottom of the statement after expenses in the area reserved for non-operational income.

When is a sale a sale?

A cash accounting method records the sale when the customer pays. An accrual method records the sale at the time the customer order is confirmed. Payment is handled separately on the balance sheet against the receivable generated from the sale. Why is this an issue? The accrual method attempts to match a sale’s income with its expenses to better determine if the sale was profitable. Cash accounting tracks sales and expenses as they are paid by your customer or you making it harder to determine if the sale was profitable.

When printing out your P&L use the feature (within software) called percent of income. What this does is divide each account for income and expenses by the total sales for the period. Monitoring this percent allows you to compare periods regardless of the amount of the income or expense. For example, if sales for the month are 50,000 for January and your payroll is 10,000, then 10,000 divided by 50,000 equals 20%. This translates to: for every dollar of sales you spend 20 cents for payroll. The next month your sales are 40,000 and your payroll is still 10,000. 10,000 divided by 40,000 equals 25% or for every dollar of sales you spent 25 cents for payroll. You can see how knowing the percent of income can be a valuable management tool.

Solutions For the Business Financing Puzzle

The comparison of small business financing to a puzzle is not meant to diminish the critical importance of success by business owners when they encounter difficulties with commercial lenders. The most practical goal for using a puzzle analogy in this article is to help describe an otherwise complex working capital and commercial finance situation in a more understandable way. The current commercial loan stakes for commercial borrowers are high because their business survival might be hanging in the balance.

In using a puzzle comparison, this analogy provides an opportunity to evaluate the commercial loans puzzle (a challenging commercial lending climate) as something that tests the ingenuity of small businesses to solve. When reviewing the current small business finance environment, an increasing number of commercial borrowers are comparing what they are finding to a puzzle with pieces scattered everywhere. The ongoing descriptions of commercial financing in terms of solving a puzzle should provide a reasonable reflection of the underlying problems that cannot be ignored by a prudent business borrower. The growing confusion represented in small business owner interactions with their current bank concerning available business financing options is no doubt also reflected by such an analogy.

Recent experiences by many commercial borrowers with their business banker probably resemble a constantly changing level of difficulty for an already confusing small business finance puzzle. It has become a common experience for banks to take over two months for a working capital financing process that should realistically be completed in three weeks or less, and in many cases even then the lender does not complete the process for providing the requested working capital to the business which has been waiting without any awareness that funding might not be finalized. Suggestions that commercial lenders have misrepresented what is required to finalize commercial loans are emerging in too many reports for borrowers to ignore.

For a number of years most business financing has been more complicated than borrowers realize. Recent events have made these complexities more obvious primarily because the eventual results have changed so drastically. It is situations like those noted above that cause business borrowers to feel like some of the required puzzle pieces have been removed from the board. In effect that is exactly what has happened in many cases because fewer banks are now providing small business financing. When this happens with the bank that a business has previously relied upon for their small business finance needs, a business owner is indeed likely to feel as if the commercial finance puzzle pieces have disappeared.

By continuing the puzzle analogy, there are two practical options for commercial borrowers to analyze and consider. First, in an approach which can lead to a small business finance puzzle which will involve “fewer pieces” if executed successfully, business owners should assess the potential for a reduction in their commercial debt requirements. Second, by looking for alternative commercial lending sources, small businesses should attempt to find the “missing pieces”. As with any complex business financing situation, both of these (as well as any other realistic commercial loan choices) should be thoroughly reviewed with the help of an experienced expert.

What Are the Biggest Problems Small Businesses Are Dealing With?

The study from the National Federation of the Independent Business Research Foundation, sponsored by Wells Fargo, recently researched the issues that small business owners consider to be the most problematic in their work. No wonder, on the top is the problem with health insurance, but liability insurance as well. In second place are the business costs and difficulties with small business financing, with emphasis on the tax cluster and worker’s compensation.

Difficulties such as incompetent employees, problems with customers and suppliers and inability to organize their time between job and family are also regarded as important, but with much lower ranks, according to this survey. Even though most of the small business owners don’t have time nor interest to deal with some political issues, many of them believe that politics does have an impact on their business and can be a source of their problems.

Many small businesses’ worries are connected with the cost cluster, among them, the most difficult to control are health insurance costs, energy costs and inflation. Other cost problems are connected with the costs of fuels and electricity, supplies, inventories and worker’s compensation insurance. An American economy used to provide a good, stable foundation for small business owners, but lately it had a negative turn, resulting with small businesses struggling to search for innovative ways to reduce expenses and increase sales.

Speaking of problems with taxes, we are talking about federal taxes on business income, property tax (real, inventory or personal property), tax complexity or state taxes on business income. Obviously, most of the high ranked problems small business owners deal with are connected, this way or another, with some general issues or a state. The only way to deal with those difficulties is to be well informed and to have a good strategy. Never underestimate the importance of a good small business plan.

Still, there are some concerns more locally oriented, which are connected with the organization within the company itself. There are, of course financial problems, which could be solved by careful and professional managing and a special emergency bank account with some money saved on regular basis but used only in tough months.

The survey also showed that some of the everyday headaches a small business owners may have, come from their near surrounding. For example, incompetent employees which can give company a very bad look. In comparison to large companies, small businesses have a high employee turnover, and reliable and trustworthy employees are a great challenge.

Maybe the most serious problem of this kind is a relation with suppliers. Most of the businesses are sort of net or chain of services and goods, and a flue of the money, so one business works as good as is the functioning of business deal with suppliers or other company you cooperate with.