Every business owner has access to a treasure chest that many are afraid to open. Occasionally, their accountant shows up, opens the chest and tells you how much to send to the IRS…followed by an invoice for their work. You may never even look at the paper work, the system or the checkbook…you’re focused on keeping your business busy and your clients happy.
Maybe it’s time to move beyond just watching the cash in the checking account, to understanding how to use your accounting records can help you to more effectively manage your business and grow your bottom line.
Your accounting records can be used to:
- Help you to understand which of your products/services provide the most revenue, and better yet which ones are most profitable,
- Help you to grow your bottom line at a faster rate than revenue,
- Effectively manage your costs,
- Invest wisely in the future,
- Improve you financial wellbeing,
- Inform you of trouble on the horizon, so that you can act sooner to avoid it.
- Secure financing from the bank, and yes….
- Prepare the tax documents.
So why don’t you use them for all of those reasons? Unfortunately many business owners don’t have the skills or background to effectively utilize the data they spend so much to maintain.
By developing the tools and knowledge, business owners can use their accounting records to manage their business more effectively.
Your Statement of Profit and Loss
Let’s start with the P&L. The P&L, or profit and loss is a standard report available in most accounting systems. As its title indicates, it tells us if we’ve generated a profit or a loss in your business. However, it can provide us with a lot more information.
- Revenue…The first section of the report tells us about our revenue (often referred to as sales or income as well). In this section we can quickly compare our revenue over time, by category, by employee or any other breakdown we choose to track.
- Cost of goods sold (CoGS)…This section informs us of the cost of generating the above revenue. This could include the purchase price of goods for a retailer, the cost of plumbers and materials for a plumbing company, the cost of consultants for a consulting firm or the cost of materials and labor for a manufacturing company. Cost definition can be very personal for your business, or be aligned with benchmark for your industry. The latter will allow you to identify opportunities and successes relative to your competitors.
- Sales and Marketing Costs…In this part of the profit and loss we identify the costs associated with bringing our product to market. The costs of our selling team, materials to support them and other marketing appear here.
- Administrative costs…In this section, we find the costs for our admin team, real estate, and many of the other items required to conduct business. Looking at these costs across periods, and compared to other companies can help us to identify opportunities to save money and improve our bottom line.
- Operating profit…is what’s left over after we subtract the CoGS, Sales and Marketing and Admin costs from the revenue.
- Other Income and Expense…this is where we find costs that we really don’t want to show in the operating line. It can include revenue from opportunities we seize aside from our regular business revenue, interest income or expense,
- Net income…This is how much we’ve made before TAXES!
Get to know your accounting records. You’ll be more effective managing your business.