At an early point on your quest to start a business, you will need to do some basic financial accounting. The accounting will force you to realistically look at your business from a “dollars and cents” perspective. Financial accounting is important because it allows the tracking of income and expenses, which gives an overall picture of the financial health of the business and helps to account for what your business has done historically, what it is currently doing, and what it is forecasting for the future.
Recording transactions, dates, and sources of every revenue and expense you generate is called bookkeeping, and it must be accurate, and it should be done regularly. The old saying “garbage in – garbage out” is critically relevant in a financial view of your business.
Most entrepreneur’s do their financial tracking into a simple monthly Profit & Loss (P&L) statement. (a.k.a. Income Statement) The P&L is broken into three major headings. Revenue, Expenses, and Profit / Loss.
- Revenues– this includes all money (cash, credit cards, checks, etc) you receive for the month including product sales, service sales, commissions, royalties, etc..
- Expenses – expenses are those items you have to pay out for the month including the materials, labor, and all other costs such as advertising, marketing, automobile, insurance, outsourced accounting, legal, rent, utilities, and any other business expenses yo may incur in the month.
- Profit / Loss – this is the resulting number by adding up all your revenues and subtracting all of your expenses in a month. The number can be positive (Profit)…or negative (Loss) at the end of the month.
In our example, we are going to use a simple “cash basis’ scenario meaning all your sales (revenues) are received immediately at the time of the sale, and all your costs (expenses) are paid when you pick them up. Below is a simple example of a monthly P&L statement.
Product Sales $ 1,000
Service Sales $ 4,200
Commissions $ 300
Total Revenue $ 5,500
Materials $ 500
Labor $ 2,200
Marketing $ 300
Auto $ 400
Fuel $ 100
Rent $ 1,000
Utilities $ 200
Accounting $ 200
Legal $ 200
Total Expenses $ 5,100
Profit / Loss $ 400
Therefore, Total Revenue of $5,500 -$5,100 in Total Expenses leaves a Profit of $ 400. That’s the bottom line.