The 3 Biggest Things Small Business Owners Need to Know About Their Financial Health

Running a small business is tough. Between serving clients, managing your team, and keeping the lights on, your finances can sometimes feel like an afterthought. But here’s the truth: if you don’t know where your money is going – or even if you made money last month – you’re running your business in the dark.

The good news? You just need to focus on a few key things.

1. You Need Clear and Regular Financial Reports

At the end of the day, you should always know whether you made money last month. If the answer is “I’m not sure,” that’s a problem.

Your profit and loss statement (sometimes called a P&L) is your best friend here. It shows what came in, what went out, and what’s left over. Looking at it every month gives you a quick gut check on whether your business is moving in the right direction.

But here’s where a lot of owners get tripped up: profit doesn’t always equal cash. You might show a profit on paper, but if you’re making loan payments or paying down a credit card, your bank balance could still be dropping. That’s why you have to keep an eye on cash flow as well.

The bottom line: your reports aren’t just paperwork. They’re the scorecard for your business.

2. You Need to Understand Cash vs. Accrual Accounting

This one sounds technical, but it’s simpler than it seems. There are two main ways to record your numbers:

• Cash accounting records things when money actually changes hands.

• Accrual accounting records things when they happen, even if the cash hasn’t moved yet.

  
  

Why does this matter? Because timing can make your reports look totally different. Imagine a month with three payroll cycles. On a cash basis, it might look like you lost money. On an accrual basis, those costs are spread evenly, and the picture looks more accurate.

The same thing happens with big expenses like tax bills or annual software subscriptions. Pay them all at once, and cash accounting makes it look like a disaster month. Accrual spreads it out and tells the real story.

So the key is this: know which method you’re using, and make sure your accountant helps you understand how it affects your numbers.

3. You Need Guidance, Not Just Numbers

Numbers are only helpful if you know what to do with them. That’s where the right financial partner makes all the difference.

A bookkeeper will hand you the reports. An accountant – or even better, a fractional CFO – will help you make sense of them. They’ll connect your numbers to real-life decisions like:

• Can I afford to hire right now?

• Should I raise my prices?

• What happens to my cash flow if I take on a new client?

Think of it like driving with a map. A bookkeeper gives you the map. A CFO sits in the passenger seat, points out the best route, and warns you about potholes ahead. They also hold you accountable – if they tell you to cut expenses or raise prices, they’ll make sure you follow through.

It’s not just about looking back at what happened. It’s about using your numbers to plan what’s next.

The Bottom Line

Your financial health doesn’t have to be complicated. Focus on these three essentials:

1. Review your reports every month – and look at both profit and cash flow.

2. Understand whether your books are kept on a cash or accrual basis.

3. Work with someone who can turn the numbers into actionable guidance.

Do those three things, and you’ll stop guessing and start making decisions with confidence. 

Because at the end of the day, businesses rarely fail because of a lack of effort or ideas. Most fail because they run out of money. Staying on top of your financial health makes sure that doesn’t happen to you.