Securing a small business loan is an important step for a company hoping to invest and grow. Before searching for funding resources and investment opportunities, it’s important to have a solid grasp of business financials. In addition to understanding differences between capital and operating expenses, business financials also include items that depreciate over time. A firm grasp on your company’s business financials will give you a more solid foundation and budgeting techniques, which are indispensable when seeking financing.
Understanding Business Financials
When looking at your company, there are three main business financials you must have a solid grasp on: operating expenditures, capital expenditures, and depreciation.
Company Operating Expenditures
Just as the term implies, operating expenditures are related to the daily costs of doing business. Sometimes also referred to as business expenses, this can include everything from renting an office, retail, or warehouse space to buying basic supplies, utilities, inventory, business travel, employee wages, and customer entertainment costs. When budgeting it is wise to allocate additional funding for these in case there are unforseen issues.
Another important aspect of business financials are the capital expenditures. Unlike operating expenses which are necessary to conduct day-to-day business, capital expenditures are fixed purchases a company makes as investments for growth. These expenses have three main categories: startup costs, assets, and improvements. They may include property, equipment, computers, trucks, and other tangible items that last over a year. These costs can be written off overtime.
Every company’s business financials also include depreciation, or amortization, which can be written off in tax deductions. Depreciation is the result of wear and tear, deterioration, or obsolescence of items over time. An item that depreciates must be: owned by the business, used to generate revenue, have calculated useful life, and use expectancy of more than a year.
When seeking financing, it’s crucial to have a solid understanding of your business financials. With a firm grasp on company finances, you’ll be able to plan and budget successfully and impress lenders when seeking funding.