There are two layers to creating that clear picture of your starting point.  The first is the determination of your Net Worth. To arrive at this figure simply add up the current dollar value of your Assets (“what you own,” such as a car, home, investments, savings and cash accounts, jewelry, etc.), and subtract your Liabilities (“what you owe,” such as the car loan or mortgage remainder, students loans, credit card debt, etc.).

The next layer, factoring your Average Monthly Profit & Loss (also referred to as monthly Cashflow, or P&L), will require more time and effort, but is a critical element in understanding your financial baseline.  In basic terms, your P&L equals your Income minus Expenses, or the precise amount you earn each month — from your business and any other sources of revenue — minus what you spend.  As a business owner, how do you pinpoint your P&L when income may arrive from a variety of sources at irregular intervals and one month may differ wildly from another?  The solution is to average our earnings and spending habits over a six month period.  This will capture such variations and reflect all those “special, and/or unforeseen” costs, like equipment repairs and business seminars that don’t surface every month.  Your Average P&L, then, most accurately predicts your money lifestyle in all months.

Begin by gathering your receipts and bank, credit card and income statements for the past 6 months.  Rather than totaling all of your expenses without discrimination, arrange expenses first by Personal vs. Business and then by unique categories. Avoid the common trap of lumping similar groups together.  Your “Food” category, for example, might be separated into Groceries, Dining Out, Starbucks, Baby Food, etc.  Simply labeling everything “Food” won’t provide an honest assessment of where your money is truly being spent.

Total your income over a six month period and then divide by 6 to determine your average monthly income.  Next, total each individual expense category one month at a time and divide by 6.  (If you spent 100, 150, 125, 150, 175 and 125 respectively on Groceries, your average monthly cost for Groceries would be 137.50.)  Now subtract the total of your average expenses from your average income to figure out your P&L.  If this number is positive, you’re earning more than you’re spending; if it’s negative, you’re “in the red.”

Your success depends on the clarity of your P&L and Net Worth numbers.  These answers will prove very insightful as a representation of your financial behaviors.   If you discover you’re overspending by hundreds or even thousands of dollars (which is common), celebrate your newfound knowledge!  You now have an exact Cashflow Gap: the additional amount you must earn each month to meet your lifestyle choices.  Once you know what it actually costs you each month to live, it’s within your power to determine the business strategies that will allow you to acquire this income consistently.

The path to prosperity includes two points, A (Start) and B (Financial Goal).  As an entrepreneur committed to creating success in your small business, it is critical that you not avoid establishing your personal “Point A” just because it feels overwhelming. (Check out Prosperity 101 for step by step guidance that will take you through this process in 4 short weeks!) Armed with your true starting point you can now set concrete goals, determine milestones, and map a course for the future.  Follow these steps to clarify what your financial picture looks like today, so that you can begin to take the correct steps toward your oasis.

Do you run your business like this?  If the answer is no, then you don’t actually have a business. You’re merely engaging in a hobby, and it may be an expensive one.  You might be saying, “But I’m not an accountant.”  True.  However, as challenging as it may seem initially, you can absolutely learn to keep proper track of your business finances. It is critical to your success as a small business owner.

The absolute most important thing to do is to separate all your personal income and expenses from your business income and expenses.  You would never see the CEO of a big company go out and buy printing supplies from his or her personal account and you shouldn’t do this either.  This means you need to have a separate bank account for your business.  If you don’t, then all your income and expenses are mixed together and it’s far harder to keep track of everything. (It is easiest for network marketers and other home based entrepreneurs to fall into this trap.)

Once you’ve established separate accounts, place any personal earnings (if you still have a “day job,” any financial gifts, alimony, etc.) in your personal account and put your business earnings in your business bank account.  Likewise, pay for all of your personal expenses (rent, groceries, clothes, vacations, etc.) out of your personal account and all of your business expenses (supplies, equipment, salaries, etc.) from your business account.

This is simple, but not necessarily easy.  It may require a shift from how you’re accustomed to doing things now.  Newer entrepreneurs may be saying, “STOP!  I haven’t yet created success with my small business. I don’t make enough money from my business to pay for all of my business expenses.”  If this is the case, simply make loans as necessary from your personal account to your business account and be sure to keep records of those loans.  When your business becomes profitable, it can pay you back.

You should also have a separate business credit card.  Charge personal items to your personal credit card (and hopefully pay off the balance every month) and charge business expenses to the card that you’ve designated as your business credit card.  This way, if you’re carrying a balance on your business credit card, then the interest will be tax deductible.  This isn’t possible if there’s even one personal expense on the card.

Now, what about those expenses that cross the line – a portion is personal and the rest business?  An example might be your automobile expenses or some of your household expenses if you work from home.  For these items, I suggest paying for them from your personal account BUT keep very clear records.  Have a small book or log in your car to record business mileage.  Keep all your household bills (mortgage/rent, phone, utilities, etc.) filed away so that you can use them at tax time to determine what percentage you are able to write off as a business expense.

There are three reasons why it’s important to follow these suggestions:

1. If you don’t treat your business as a business, you’ll never make a business income.

2. If you don’t keep appropriate records and you’re audited, the IRS may classify your business as a hobby.  This could mean loss of tax deductions and potential penalties.

3. You’ll be easily able to track  your progress towards success in your small business, determining when you’ve become profitable.  This allows you to make any necessary adjustments and corrections along the way.

Have faith in yourself.  You can do this.  Visit http://www.AbundanceBoundSystem.com for all the step by step guidance you need to ensure you are laying the proper foundation that will support your success and allow your small business to thrive.