Is bookkeeping a priority for you? Learn how your numbers can work for you and generate profit.
Why Should I Care About Accounting?
Bookkeeping isn’t only a necessary part of any business, but also a crucial component in profit maximisation. While it may be tempting to not focus on this area, it is exactly where you’ll learn what works for your business and what doesn’t.
Your business process (i.e. how you go from rendering a service, to generating profit) mightn’t be completely clear to you, especially in the initial stages of your business. You might also feel like all you do is plugging up holes, as you ride the learning curve.
But believe it or not, sound accounting is how you can develop an efficient operating system, and really increase profits.
What Do I Need to Know?
But if you have no background in accounting, or are just intimidated by numbers (as so many of us are), there’s no need to chuck this post on the backburner just yet.
With some foundational concepts from Meryl Johnston and her team at Bean Ninjas, you’ll quickly learn how to get started when it comes to bookkeeping. You’ll also discover exactly how this process can prove truly valuable.
In this post, we’ll specifically look at what it means to study reports, as well as which sections you want to pay particular attention to. We’ll also look at how you can get a handle on ratios.
While this post is more of an introduction, I will also point you in the direction of some more detailed resources, regarding a few specific items I mention.
My aim here is to enable you to streamline your business, by knowing what you should be responsible for, when it comes to bookkeeping, and what you can delegate. Efficiency and accuracy are key.
From this, you’ll be able to develop a measurable track record of credibility, profitability, and even greater potential.
How Does Knowing Your Numbers Increase Your Profits?
Let me start by just saying that as a business owner, you don’t have to be the accountant for your entire operation.
What you need to specifically focus on, however, are the key reports that will help you to understand how your business is performing.
On our recent webinar with Meryl Johnston, we went over the specific ways in which you can learn to properly interpret a report, among other key bookkeeping points.
A report won’t do you much good if you can’t read it!
Imagine if you had access to a monthly report which offers you a snapshot of your business, where you can quickly see where you’re losing money and where you’re making it.
That’d be extremely useful, right? You bet it is!
With this tool, you can also identify areas which need tweaking (or removing), and which activities are particularly successful so you can do more of them.
Let’s jump into which reports you need and why you need them.
Which Reports to Have:
Two essential reports are the Profit and Loss report as well as a Balance Sheet. These reports are fairly common, as well as self-explanatory.
With the Profit and Loss reports, you ideally want to accumulate at least a couple of months’ worth of reports, to make a fair comparison of profits and losses. But you can always compare your very first report to your budget and see how your results stack up to initial projections.
Your balance sheet is also pretty straightforward; listing your assets and liabilities, etc. You can use it calculate your income to expenditures ratio.
With these two reports, you’ll quickly determine whether or not you’re getting more than what you’re putting in. The important part in these documents is how to recognize which business components are putting you at a loss and which components are more fruitful.
Other Handy Reports
Once you’ve started working with the Profit and Loss Report and the Balance sheet, you can introduce other reports into your inspection of the business. The following is a list of practical reports which can really increase profit.
Profitability by Customer/Job—You get specific about the profitability of each of your jobs and/or each of your customers.This is a good tool for potentially refining your target market.
Cashflow Forecast—A forecast basically helps you to determine what cash you have available as well as your expected bank balance by projecting the cashflows-in and cashflows-out.
Actual Profit Compared to Budget—This report, as the name suggests, tracks your budget profit against your actual profit.
Why use Cashflow Forecast and why use Actual Profit Compared to Budget? The former addresses your wiggle room (i.e. available cash) while the latter looks at business performance overall (i.e. are you generating real profit?).
You can use these reports to determine which areas of your business are the most liquid, and which areas generate the most long-term value, for both you and the customer.
Bank Reconciliations—This report compares and helps to reconcile your bank statement balance with your actual balance. Any discrepancies, however minor, can be found here. In an overview of the business, this is the first place that your bookkeeper will look in the case of fraud.
Asking to see this report on a regular basis will help you catch any flaws in your system no matter how small. It’s absolutely critical for the business owner, but also the most often overlooked.
Ratios are crucial in interpreting the performance of your business. According to Meryl, the most important ratio to keep an eye on, especially in the service industry, is the gross profit margin.That’s sales or revenue less the cost of goods sold (and, this would include labor).
Remember, this snapshot can help you quickly analyze what’s working and what isn’t. You’ll be able to fine tune and course-correct month by month, compounding your skills and service, as well as your profitability.
Meryl does, however, also mention that prior to mastering the ratios of your business, it’s important to establish a couple of things:
- Have a Chart of Accounts that is aligned with your ratios, and
- Make sure that the coding for each particular account you have within this Chart is consistent.
These are actually quite common mistakes, Meryl reveals, and, without these factors in place, you run the risk of accumulating inaccurate data. Inaccurate data means you can’t look at those percentages and ratios in any meaningful way.
Get on top of your numbers
I hope you’ve been able to get some initial ideas to set up your own streamlined system to manage your numbers. As Peter Drucker says, “You can’t manage what you can’t measure.”
Ultimately, don’t be afraid to tackle the bookkeeping side of your business. It’s quite possibly the area that will offer you the greatest reward!
Once you’ve got your foundation, be sure to check out our free Profitability Pulse Check, so you can learn more about the most important ratios you need to be aware of for your business.