Bookkeeping Your Business to Financial Health
Small business owners, we make a living doing what we love, right? Whether your passion is fixing cars, building houses, writing copy, or serving pizza you must also do the behind the scenes work to ensure your business’ financial stability. Numbers may not be your passion, but they are a necessity. Here are basic tips and techniques to bookkeeping your business to financial health.
Let’s Talk Budgets
If you don’t know where you want your business to be in one, five, or ten years, will you still be in business at those benchmarks? It is not enough to simply record income and expenses; you must develop a road map, a budget, to help you carry out your business’ objectives and strategies in a manner that makes sense to you and that is measurable.
A budget is a plan of action for achieving desired results by estimating income and expenses for a period of time, usually a fiscal year. It is based on both past results and future forecasts. Say you plan to give your employees a 3 percent pay increase; you can use last year’s payroll expense (if same number of employees) to budget what the increase in labor costs equates to and how it affects your bottom line. A budget can also help set income targets and maintain expense levels.
Your budget is also a standard for measuring results by comparing actual income and expenses against your estimates. It can help project “what-if” scenarios, control costs, and maintain certain ratios or put limits on spending categories. For example, you may determine marketing is not to exceed 10 percent of sales. Now, you can project available marketing dollars based on your projected budgeted sales figures.
To get started or to reassess your current budget, I recommend what I call Upside Down Budgeting. This process requires you to track daily, every expense and income for a month. That tracking should include the account that the expense (e.g., marketing, labor, office supplies) and income (e.g., labor,product sales) belongs in and the cost, detail,and frequency of each expense and income. This will provide you a real-time picture of your cash flow so that you can make any adjustments to your budget and chart of accounts.
What’s the True Cost?
For your business to have income, you must first charge for your products and/or services, but how do you determine what that charge should be? Break down the true cost of every service you provide or product you sell. A restaurant that makes and sells pizza needs to determine how much each pizza costs to make. The most obvious is the cost of the ingredients, but what about the shipping costs associated with those ingredients and the cost of the oven and the cost to heat that oven? The owner also has to pay someone to make the pizza. What is that labor cost including payroll taxes and paid leave time to make each pizza? Once you’ve determined your true cost for every product and service, you can now determine what your selling price should be for your business to be profitable. With that information, you are now able to forecast your expenses and income for the year. So, how many pizzas do you need to sell a year to make a profit 😊?
Know Your Key Financial Reports
The balance sheet reports the assets, liabilities, and owner's (stockholders') equity at a specific point in time displaying a snapshot of a business’ financial health. The balance sheet is also referred to as the Statement of Financial Position. Balance Sheets 101
Income Statement (also called Profit and Loss)
The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income. This report shows the profitability of a company during the time interval specified in its heading.
Income statements typically include the following information:
- Revenue: The amount of money a business takes in
- Expenses: The amount of money a business spends
- Costs of goods sold (COGS): The cost of component parts of what it takes to make whatever a business sells
- Gross profit: Total revenue less COGS
- Operating income: Gross profit less operating expenses
- Income before taxes: Operating income less non-operating expenses
- Net income: Income before taxes less taxes
- Earnings per share (EPS): Division of net income by the total number of outstanding shares
- Depreciation: The extent to which assets (for example, aging equipment) have lost value over time
- EBITDA: Earnings before interest, taxes, depreciation, and amortization
Cash Flow Statement
The statement of cash flow reports the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement. The cash flow statement provides clear information on where cash is flowing to and from. How to read a cash flow statement