Financial Fundamentals for Small Business Owners
Cash vs. Accrual Accounting
What’s the difference? And which is right for your business?
Cash-Basis Accounting
You record income when the money arrives and expenses when you pay.
Simple, straightforward, great for side hustlers or small businesses just getting started.
Accrual-Basis Accounting
You record income when you invoice, and expenses when you incur them — regardless of when the money actually moves.
Perfect for businesses that want to understand their profitability beyond their bank balance.
So which should you use?
If you’re looking to just make a little money on the side from your 9-5 in a service based field, cash-basis accounting is the right choice.
If you want a more accurate picture of how your business is truly performing and have plans to grow the business significantly, accrual is the way to go.
Whatever method you choose, the key is being consistent!
Never Mix Personal with Business Expenses
It can cost you THOUSANDS!
How?
You'll lose out on potential deductions
Trigger audit red flags everywhere - drawing out the audit process even longer
Legal issues - risking your personal finances by piercing the corporate veil
No funding - banks or investors won't fund a business with commingled books
Get More Out of Your Business’ Financials
This is the #1 reason why people might feel like they are doing everything right, but still struggling to make sense of their business’ financial reports.
It's your chart of accounts.
Your chart of accounts is the backbone to all your financial reporting. It's the different categories or accounts you put expenses and income into when reviewing transactions.
How you organize those accounts NEEDS to have some thought and purpose behind it. The Quickbooks default is not going to cut it!
Why?
Every business is different. Everyone's streams of income are not going to be the same and neither are the costs to deliver their products or services.
You'll miss out on impactful insights - business unit profitability, spending trends, & deduction opportunities.
Getting this right will not only make your life easier and your business healthier - your CPA will love it as well!
Understanding and Optimizing Your Profit & Loss Statement
Profit = Revenue - Expenses
Besides net profit, gross revenue, and operating profit, what else can I get out of my P&L?
You can calculate profit margins and compare to your industry standards to ensure that your business isn't overspending or under charging.
You can use revenue numbers to calculate profitability ratios of each of your products or services.
You can track trends and make changes throughout the year to optimize your business's expenses and rates.
Understanding the concept of a P&L isn't the difficult part. The structuring of your chart of accounts in a way that will provide the most insight for your unique business within your P&L is the part that most small business owners never end up doing. It’s right up there with consistently updating and reviewing their P&L and key ratios.
Understanding Your Cash Flow Statement
Cash flow is THE biggest concern for small businesses. Which makes knowing what a cash flow statement is and how it can help your business THE most important thing for a small business owner to be doing.
There are 3 core sections that make up a cash flow statement:
Operating Activities
Investing Activities
Financing Activities
Each of these sections tells a story of where your business's cash is going. For example how much owners withdrew, total loan funding the business received, the amount of loan repayments made, what was spent/received from purchasing/selling vehicles, what was spent/received from purchasing/selling real estate, and how much was made from operating.
These sections will all have a balance of some sort and can be tracked over time so you can ensure that you are not veering off coarse. You can set goals to increase the end balance of Cash for the business and so much more.
Like your P&L, it's CRUCIAL that your cash flow statement be reviewed monthly so that any veering is caught and addressed quickly.
Where does a balance sheet fit in when reviewing the health of your business?
A balance sheet shows your assets, liabilities, and equity.
On your balance sheet your assets subtracted by your liabilities NEED to equal your equity that you are showing. If they don't.... we've got problems that need fixing.
If everything lines up, that's great! It's time to start digging into the different ratios and trends that can help indicate the health of your business. Here are some to consider running starting today:
Liquidity & Short-Term Health
Current Ratio = Current Assets ÷ Current Liabilities
It's your ability to pay short-term obligations. Aim for 1.5–2.0 (greater than 1 means you can cover your bills).
Quick Ratio = (Cash + Accounts Receivable + Marketable Securities) ÷ Current Liabilities
It's like the Current Ratio, but more conservative. It excludes inventory and prepaid assets. ≥ 1.0 is ideal.
Leverage & Debt Management
Debt-to-Equity Ratio = Total Liabilities ÷ Total Equity
It shows how much your business is financed by debt vs. your own investment. Benchmarks vary by industry, but generally < 1.5 is considered healthy for small businesses.
Debt Ratio = Total Liabilities ÷ Total Assets
Shows what percentage of your assets are financed with debt. Lower is better. Under 0.6 is a conservative target.
Efficiency & Operations
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
It shows how quickly you're collecting payments from customers. Higher is better. Low turnover means slow collections/cash flow risk.
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
It shows how fast you're selling and replacing inventory. The ideal ratio depends on your industry. A higher number generally indicates better inventory management.
Owner’s Equity Health
Working Capital = Current Assets – Current Liabilities
Shows how much buffer you have to operate and invest. Positive working capital = breathing room.
Return on Equity = Net Income ÷ Owner’s Equity
It shows how efficiently your business is using invested capital to generate profit. 15–20% is often considered good, but depends on your industry and business model.
Why is reconciling my accounts non-negotiable?
Catch Errors Early
Duplicate charges, missed deposits, and bank mistakes happen more often than you’d think.
Prevent Fraud
Regular reconciliations help detect unauthorized transactions before they spiral into major losses.
Make Tax Time Easier
Clean books mean smoother filings, fewer surprises, and less stress during tax season.
Maintain Cash Flow Clarity
You can’t make confident financial decisions with inaccurate or outdated data.
Stay Compliant
Lenders, investors, and auditors all expect reconciled and reliable financials.
Aren’t a Bookkeeper and CPA basically the same thing?
Nope — and mixing them up could be costing you and your business.
Your Bookkeeper: The Daily Tracker
We:
Categorize transactions & reconcile your bank accounts
Track income + expenses
Generate financial reports
Help you understand your numbers in real time
Help with preparing documents for tax season
Manage your payroll
Manage your accounts payable and receivables
Think of us as your financial translator and day-to-day financial organizer — keeping your books clean and making sure you know what’s really going on in your business.
Your CPA: The Big-Picture Strategist
A Certified Public Accountant usually steps in for:
Tax planning + filing
Financial audits
High-level advisory
Compliance and legal reporting
CPAs are experts in tax codes, government regulations, and strategic tax planning. They’re especially helpful at year-end and during major financial decisions (like selling, buying, or restructuring your business).
Why You Need Us Both
Your bookkeeper keeps the engine running.
Your CPA helps you steer the ship.
Together, we make sure:
Your records are clean
Your decisions are informed
Your tax season isn’t a panic attack
You’re growing with confidence — not confusion
Are You Still Doing Your Own Books? Here’s When It’s Time to Get Help
As a small business owner, you wear a lot of hats — but “bookkeeper” doesn’t have to be one of them forever.
Here are 5 clear signs it might be time to bring in a professional:
You’re spending more time on QuickBooks than customers.
When admin starts eating into the hours you could be growing your business, it’s costing more than you think.
Your books are always “almost done.”
If your financials are constantly behind, you may not be getting the full picture — which makes decision-making risky.
Tax season = panic mode.
Scrambling for receipts and missing documents every year? A professional can keep things tidy year-round.
You’re not sure what your numbers are telling you.
Reports aren’t helpful if you don’t understand them. We turn data into clarity — so you can make smarter moves.
You lie awake wondering if you missed something.
Payroll errors, late filings, or incorrect categorization? Stop second-guessing and get peace of mind.
If any of this sounds familiar, it’s probably time to delegate your bookkeeping — and reclaim your time, confidence, and focus.
Thought About Selling Your Business Someday? Here’s How to Maximize Your Valuation
When business owners think about selling, they usually focus on:
Revenue
Customer base
Brand value
Equipment or assets
But the REAL deal maker or breaker is... Your bookkeeping.
Here’s why:
Buyers want confidence.
Messy books = uncertainty = risk. If they can’t clearly see where the money comes from (and goes), they’ll lowball — or walk.
Lenders and investors rely on financial clarity.
Many buyers use loans or outside capital. If your books are a disaster, banks won’t touch it.
Profit margins matter more than revenue.
Well-structured financials help you prove your profitability — not just claim it.
Time kills deals.
Due diligence takes longer (and gets more expensive) if everything has to be cleaned up last-minute.
Clean books show professionalism.
It tells buyers, this business is well-run, organized, and ready to scale — with or without you.
Translation? The better your books, the more attractive your business is, the better your valuation. Not to mention how more smoothly and profitable the process will go for you. You don’t get a second chance to make a first impression on a buyer.
If selling your business is even a distant goal — whether 1, 10, or 20 years out — start building clean, trustworthy financials now!
Top Ten Metrics and Ratios for Small Business Owners to Track
Net Profit Margin = Net Profit ÷ Revenue
Measures how much profit you retain from each dollar of revenue.
Cash Flow Margin Ratio / Profitability Ratio = Operating Cash Flow ÷ Net Sales
Measures how efficiently you are generating cash from operations.
Gross Profit Margin = (Revenue - COGS) ÷ Revenue
Reveals how efficiently you deliver your product/service.
Customer Acquisition Cost (CAC) = Sales & Marketing Costs ÷ New Customers Acquired
Helps measure marketing/sales ROI.
Customer Lifetime Value (CLTV or LTV) = Average Purchase Value × Purchase Frequency × Customer Lifespan
Measures how much value each customer brings over time.
Accounts Receivable Turnover = Net Credit Sales ÷ Avg. Accounts Receivable
Measures how quickly you're collecting on invoices.
Burn Rate = Monthly Operating Expenses - Monthly Revenue (only if expenses > revenue)
Shows how fast you're using cash reserves.
Inventory Turnover = COGS ÷ Average Inventory
Tells you how efficiently you're managing inventory.
Debt to Equity Ratio = Total Liabilities ÷ Equity
Shows how leveraged the business is compared to how much equity there is.
Operating Expense Ratio = Operating Expenses ÷ Revenue
Measures what percentage of revenue goes to overhead.