You do not need an accounting degree to run a healthy business. You do need to understand a few numbers well enough to make decisions with them. Most of them can be tracked in a simple spreadsheet, and checking them monthly takes about half an hour.
Cash is not the same as profit
A business can show a profit on paper and still run short of cash. It happens when customers pay late, when inventory is bought before it is sold, or when a large bill arrives at once. Profit tells you whether your prices and costs work over time. Cash tells you whether you can pay for things this week.
Thin cash reserves are common. A study by the JPMorgan Chase Institute analyzed transaction data from about 597,000 small businesses and found that the median business held enough cash to cover roughly 27 days of typical outflows. The researchers described the typical small business as living close to month to month. The data comes from 2015, but the lesson still applies: a few slow weeks can be a serious problem when reserves are small.
Estimate what it takes to start
The SBA advises splitting your expenses into one-time costs and monthly costs. One-time costs include major equipment, a logo designer, permits, licenses, and fees. Monthly costs include salaries, rent, and utilities. It suggests counting at least one year of monthly expenses, and adding the two groups together shows how much capital you need and when you need it.
The three numbers to check every month
- Cash on hand. How much is in the bank, and how many weeks of expenses does it cover?
- Money in and money out. What did you earn and what did you spend? Sort spending into fixed costs, like rent and insurance, and variable costs, like materials.
- Your break-even point. How much do you need to sell to cover your costs?
How to find your break-even point
The break-even point is the point at which your total costs and total revenue are equal, so you make neither a loss nor a profit. Free online calculators can do the work, and you can also do the arithmetic yourself:
Break-even sales = monthly fixed costs รท (price minus variable cost per sale)
Here is an invented example. A candle maker pays $1,200 a month in fixed costs for rent, insurance, and software. Each candle sells for $20 and costs $8 in materials, so each sale leaves $12 to cover fixed costs. Dividing $1,200 by $12 gives 100 candles a month. Sales above that number produce profit. Sales below it produce a loss.
If your break-even number seems out of reach, that is useful to know before you spend money. You can raise prices, cut costs, or reconsider the plan.
Set money aside for taxes
Owners do not have taxes withheld from their income the way employees do. According to the IRS, people who are in business for themselves generally need to make estimated tax payments during the year. Sole proprietors, partners, and S corporation shareholders generally must do so if they expect to owe $1,000 or more when they file. Estimated tax covers income tax and also other taxes such as self-employment tax, and underpayment can bring a penalty. Special rules apply to farmers and fishermen, so agricultural founders should check their own situation.
A simple habit is to move a fixed share of each sale into a separate savings account. Ask a tax preparer what share is right for you. This article is general information, not tax advice.
Habits that keep the numbers honest
- Open a business bank account so business and personal money never mix.
- Record every sale and expense weekly, not once a year.
- Keep receipts, digital or paper, for anything you deduct.
- Review your three numbers on the same day each month and write down one decision.
Get help early
A local accountant or a Small Business Development Center advisor can set up your books correctly in an hour and save you cleanup work later. When you are ready to write your numbers into a plan, our guide to the one-page business plan shows where they belong.