Knowing your finances
Whatever your business goals, knowing your numbers helps you get there. Strategic finance is about being more deliberate in your approach to spending, saving, borrowing, and raising money from investors.
Being strategic with your finances helps you spot opportunities and decide which ones to make the most of.
If you understand your finances, you’ll be able to check:
- what’s running smoothly
- where you need to focus to get back (or stay) on track.
You’ll need to master spreadsheets, statements, balance sheets, and equations to really nail your numbers.
Knowledge is power
Knowing your numbers inside out helps you to better analyse ways for your business to survive and thrive. To use your money well, it helps to speak the language of business finance — and learn to record and interpret your figures.
Your business will be healthier if you:
- know how much you spend to make your products or services
- know whether you earn enough to cover expenses — overall and for each income stream
- track all the costs for each sale
- understand the investment and costs of new opportunities.
Whether you want to enter new markets, develop a new product, or sell up and move on, you’ll have the numbers to back your decisions. And if you ask someone to invest in your business, you’ll have to understand and show how your business makes its money.
Balance sheets
A balance sheet is a snapshot of your business’s financial position at a particular time.
It’s in three parts:
- assets (the things your business owns)
- liabilities (the money you owe)
- equity (the net value of your business: assets minus liabilities equals equity).
These three parts should balance — this means a final result of zero. All businesses use balance sheets to track what is happening between reporting periods.
Financial strategy for your small business
Transcript
Video transcript: Financial strategy for your small business
[Audio/Visual: Upbeat music starts playing. The screen is see-through blue, with the words “Financial strategy for small business” in thick white text on the righthand side, and the text “business.govt.nz” in the bottom right corner. This stays throughout the entire video. On the left side of the screen, two people are sitting at an office desk and discussing something on a laptop screen. The screen closes up to the two people looking at the laptop screen. On the righthand side, the text is replaced by a big “Q” in thin blue, with the text “Why is understanding finance important for business owners?” next to it. The screen changes to show the presenter. In the bottom left of the screen, an info box appears with a blue background. On the left, the New Zealand Performance Panel logo appears in white. Next to it, the words “Dr Anindya Sen, Department of Finance & Executive Programs University of Otago” appear in thick white text. Music continues to play throughout the entire video.]
Understanding finance is very important for small business owners, because it allows you to fine tune your business plan. That enables you to identify opportunities, avoid risks and communicate better with people in the banking and business world.
[Visual: Screen changes to show a shop interior with people shopping. The video spans over different products in the shop, closing up on shoes and clothes on racks. A person brings items to the shop counter to purchase.]
For example, let's say you run a store, and you find that 95% of your money goes into paying your expenses. So that means it's quite risky. You're cutting it fine, right?
[Visual: The screen changes to show the presenter again.]
But then you look, and you find that most of those expenses are paying the rent, because you're in the middle of downtown. So you might have an opportunity there, just relocate your store somewhere else and avoid that big expense.
[Visual: The screen changes to show a person sitting in an office open space, working at a laptop. The video closes up to the person’s face, then shows the laptop screen, then an even closer up of the person’s face.]
And in case you perhaps need a loan to help with that relocation, then because you know finance you're able to speak with people in the banking world, you understand what they are saying, and they have more confidence in you because you know their language. And that's a big thing in business.
[Visual: The screen changes to show the presenter again.]
Another very important issue is staying within the law. So, every business needs to pay tax. And in order to calculate the tax correctly, you need to know the details of your financial statement.
[Visual: The screen changes to show the presenter sitting with someone else and looking at a laptop screen. They are shown from different angles, and then the video closes up on their faces.]
Thus, if you understand you finances, you can grow you business, you can [KS1] avoid risks, you can stay within the law, and you can free up more time and work more efficiently.
[Visual: The screen changes to show a see-through blue background. Behind it, a closeup shows someone’s hand working at a laptop. On the righthand side, a big “Q” in thin blue appears, with the text “So, where should I star?” next to it. The screen changes to show the presenter again.]
It's not hard or scary to get started at all. Just head to the website business.govt.nz. Take the first step by reading the section on how financial statements work, and then you can watch videos explaining it further like this one. Good luck!
[Visual: Blue outro screen appears with the business.govt.nz logo in thick white text in the centre of the screen.]
For more information, head to business.govt.nz.
[Video ends]
[KS1]“you can” added
Profit and loss statements
A profit and loss, or income statement, tells you about the financial performance of your business for a particular period.
It’s in three parts:
- revenues (the money you earn)
- expenses (the money you spend)
- net profit (revenue minus expenses equals net profit).
A profit and loss statement tracks how your business is doing and can help explain changes.
Cash flow statements
A cash flow statement records money coming and going for a particular period — like your bank statement, but with insights into patterns or problems.
This statement is in five parts:
- cash flow from operations
- cash flow from investing
- cash flow from financing
- closing cash balance
- net change in cash.
Knowing how much cash you have means you can make better budgeting and planning decisions.
What's next
Business planning
Choosing the right business structure
Business and financial advice
Governance
Marketing strategy
Business strategy
Innovate and collaborate
Building a brand
Doing business online
Regional Business Partner Network