Do you really know how your business is doing? If you had to put together a profit and loss statement to convince an investor to entrust you with their money, could you do it?
Profit and Loss 101
Richard Branson didn’t know the difference between gross and net until he was 50, but he’d managed to launch multiple businesses and make millions. Unfortunately, most small business owners don’t have the resources to hire an accounting team.
So if you’re an owner who shares Branson’s incomprehension but not his resources, here’s a brief guide to tracking your enterprise’s performance.
Your business’s revenue needs to exceed its expenses – if not immediately then over the medium to long term. That seems a simple enough equation until you start trying to collect and analyse all the relevant data.
On the revenue side, you need to work out all the income you’ve derived from your primary business activities – the goods or services you sell, as well as any revenue from secondary activities, such as interest accruing on money in the bank.
On the expenses side, you need to figure out your expenditure on primary activities (producing the goods or providing the services), as well as secondary expenditures – operating expenses that are unavoidable but not directly linked to the production of the goods or services, such as renting a shop.
But Wait, There Are Even More Complications!
You may be able to collect all the relevant data and calculate whether your revenue exceeded your expenses in a particular quarter. Unfortunately, that doesn’t necessarily give you an accurate picture of your business’s health.
You may incur a lot of costs in one quarter but make most of your yearly revenue in another. Then there are the complicating factors of cash flow and longer-term trends.
For example, say your business has expenses of $100,000 a month and three customers who each pay you $50,000 in that same period. On paper, things look good. However, if one of those three customers pays late or not at all, you’re barely breaking even. If one of the remaining two customers also starts to fall behind with payments, you’re on your way to declaring bankruptcy.
In the real world, the only constant is change. For example, if you’re running a café you may not notice that customers who used to come in five days a week have cut back to three visits. Or that people are switching from (low-profit-margin) lattes to (high-profit-margin) mochas. Individually, those consumer decisions may not mean much, but they can determine whether your ‘bottom line’ net profit is rising or falling.
Technology to the Rescue
Wouldn’t it be great if there was accounting software designed specifically for the self-employed? A mobile app that creates and sends professional invoices quickly on the go? One that enables online payments so you’re paid faster?
A tool that automatically tracks mileage for tax deductions? Something that lets you take and store pictures of receipts so you don’t have to worry about losing them?
How about one that categorises deductions so your customers can cut their tax bill? A mobile app that will do the maths to help you set aside money for worry-free quarterly taxes?
Small business accounting software that can do all of the above has been around for years. Recent iterations are particularly user and mobile-friendly. That means even the most Branson-minded businessperson can, through the use of a product like QuickBooks Self-Employed, can gain a sophisticated understanding of how their business is tracking.
Of course, no software can ensure a business is successful. But having accurate, timely information about expenses and revenue allows small business owners to make smarter decisions.
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