Every brand or company’s goal is to be profitable. Whether you run a small or large business, you need to be able to manage your financial statements efficiently, particularly your profit and loss statements, to achieve positive earnings and ensure that business expenses are kept under control. An experienced in-house accounting team or outsourced accountancy services is crucial to effectively manage this part of the business.
Today, everyone is practically an “entrepreneur”. More individuals are moving away from the typical nine to five workforce and carving their own path. Entrepreneurship is fun but it’s far from easy and one of the toughest parts about being an entrepreneur is profit management.
When
you choose to be an entrepreneur, there will be slow months when
you’ll be tight on cash. To prepare for these times, you should develop diligent money management habits. If you’re just
starting out here’s some money management advice that will help you stay
afloat.
Trying to run a business without
carefully managing cash flow is like trying to drive at night without
your headlights. You’re not likely to make it to your destination. Many
businesses run out of money and this is one of the basic factors that
cause businesses to fold up shortly after launch. Startups can refuse to
fold up is their owners will learn to be smart about how they spend
their capital and company income.
What is Profit and Loss and why is it Important
Profit is simply the money or income that your business has gained less the expenses you have paid. Loss, on the other hand, happens when the expenses incurred by the business exceeded the amount of sales that your company has made during a specific accounting period.
You must manage your company’s profit and loss to ensure that your business has enough money to stay in operation. Moreover, effective profit and loss management makes it more possible for your business to achieve its profitability goals.
Many things are involved in understanding your Profit and Loss Statement and accuracy is one. Accuracy is necessary when preparing a profit and loss report. This report is a financial statement that details all the expenses, revenues, profits, and losses accrued by you or your company over a specified period of time. With an accurate profit and loss statement, you will be able to gauge your ability to manage expenses, generate sales, and increase profits. When reading a profit and loss statement, all you need to keep in mind is to see if you are making more money. Simply put, the bottom line of this statement is to show the sales you have made minus the expenses incurred.
At the top of the statement, the revenue or income your business has made is listed first. This is followed by the costs or expenses incurred by the business and concluded by the net income or profit. Whilst you will see a lot of subtotals on this statement, what you need to review ultimately is the number at the bottom: the net income or net profit. If your business is making money, you will see that your net income has exceeded your expenses. On the other hand, you will see a loss when the expenses show you spent more than you earned.
Minimizing your expenses whilst keeping your earnings stable is your ultimate goal when managing profit and loss. So, here are a few useful tips to help you effectively manage profit and loss.
1. Do an initial assessment
You should make a regular review of your past profit and loss reports and compare them to your current one. This will allow you to come up with performance benchmarks when establishing the company’s average income and expense levels.
2. Use Analytical tools
As a company, your accounting team should have proper analytical financial tools to structure your profit and loss statement based on your business operations. Having analytical tools makes it more organised to review or analyse your profit and loss statement. If you are running a sole proprietorship you definitely have to put your hands on some mathematics to sort this out. Alternatively, you can try outsourcing. Outsourced accounting teams are specialists you can hire to provide accounting and bookkeeping services that meet industry standards. You can engage them to prepare your financial reports, such as your profit and loss statements, and handle all the accounting-related activities of your business. On top of preparing timely and regulatory-compliant reports, outsourcing to a reputable accounting firm can also help you get expert insights on how you can effectively manage your company’s earnings and expenses. They have dedicated accounting specialists who can let you in on some valuable advice to help you control your expenses and increase your revenue. Given these benefits, it is important that you weigh the pros and cons when outsourcing to an accounting firm. It may or may not be an ideal setup for the kind of business your company is involved in. Whether you engage an outside firm or not, what you should always keep in mind is that you should always be on top of all your financial statements. This way, you are always in the know when it comes to your company’s financial health.
3. Record your Increased Expenses
Analysing expense growth can help you evaluate your company’s use of resources.
4. Review Company Sales
A detailed analysis of the company’s sales will allow you to understand if there has been an increase or decrease in sales of your product or service. This will allow you to gauge if you need to discontinue a certain product or service line that does not generate income or sell off assets to increase your capital.
Remember that accuracy is key in ensuring that your profit and loss statement is effectively handled. To ensure that accuracy in making financial reports is never compromised, engaging a dedicated accounting team like an outsourced accountancy services can help you get timely reports that reflect the highest level of accuracy.
What is Profit and Loss and why is it Important
Profit is simply the money or income that your business has gained compared to the expenses you have paid. Loss, on the other hand, happens when the expenses incurred by the business exceeds the profit that your company has made in a specific accounting period.
It is a must to manage your company’s profit and loss to ensure that your business has enough money to keep its operation. Moreover, effective profit and loss management makes it more possible for your business to achieve its profitability goals.
Understanding your Profit and Loss Statement
Accuracy is necessary when preparing a profit and loss report. This report is a financial statement that details all the expenses, revenues, profits, and losses accrued by the company over a specified period of time. With an accurate profit and loss statement, you will be able to gauge your company’s ability to manage expenses, generate sales, and increase profits.
When reading a profit and loss statement, all you need to keep in mind is to see if your company is making money. Simply put, the bottom line of this statement is to show the sales your company has made minus the expenses incurred.
At the top of the statement, the revenue or income your business has made is listed first. This is followed by the costs or expenses incurred by the business and concluded by the net income or profit.
Whilst you will see a lot of subtotals on this statement, what you need to review ultimately is the number at the bottom: the net income or net profit. If your business is making money, you will see that your net income has exceeded your expenses. On the other hand, you will see a loss when the expenses show you spent more than you earned.
Accuracy is key in ensuring that your profit and loss statement is effectively handled. To ensure that accuracy in making financial reports is never compromised, engaging a dedicated accounting team like an outsourced accountancy services can help you get timely reports that reflect the highest level of accuracy.
Outsourced accounting can help manage company profit and loss. Outsourced accounting teams are specialists you can hire to provide accounting and bookkeeping services that meet industry standards. You can engage them to prepare your financial reports, such as your profit and loss statements, and handle all the accounting-related activities of your business.
On top of preparing timely and regulatory-compliant reports, outsourcing to a reputable accounting firm can also help you get expert insights on how you can effectively manage your company’s earnings and expenses. They have dedicated accounting specialists who can let you in on some valuable advice to help you control your expenses and increase your revenue.
Given these benefits, it is important that you weigh the pros and cons when outsourcing to an accounting firm. It may or may not be an ideal setup for the kind of business your company is involved in.
Whether you engage an outside firm or not, what you should always keep in mind is that you should always be on top of all your financial statements. This way, you are always in the know when it comes to your company’s financial health.
1. Know when you’ll break even.
Knowing the point at which you’ll break even won’t necessarily impact your cash flow, but it will give you goals to strive for and a ready-made target for forecasting where your cash should go in order to reach that goal.
If you focus on that goal, and the milestones you have to hit to reach the break-even point, you’ll be smarter about how you spend your startup capital along the way, and will budget accordingly.
2. Keep your eye on cash-flow management.
You need to avoid focusing too heavily on profit. While that may sound like a contradiction to my first point, it’s far from it. You look at your profit and break-even point in order to set benchmarks -- but you still need to maintain focus on cash-flow and spending. That doesn’t change just because you cross over into profitability.
3. Always maintain a cash reserve.
Every startup should expect shortfalls. They happen to everyone, even with the best plans in place. But your survival likely will depend on how you traverse those shortfalls. Having cash reserves for those lean times lessens the blow, the stress and the distractions, and allows you to stay focused on growing your business.
4. Manage funds better.
Unless you absolutely have to (which is rare), you shouldn’t handle the money for your business. That includes tracking it and handling your accounting. Hire an accountant or CFO to tackle this task for you. If you can’t bring on the extra help, designate a trusted employee to be a cash-flow monitor.
You can simplify this process by using a service and software platform like InDinero.com, which provides accounting software to make cash management easier. The service also provides access to accountants, CPAs and tax specialists who will work diligently to help your company grow. Having access to tax specialists is especially important to your cash flow, since they’ll make sure you stay on track with deadline dates for filing your business tax returns, to avoid penalties and interest.
5. Collect receivables immediately.
Try to make any invoices “due immediately” and limit the use of net terms longer than 15 days. If you can do so, delegate the task of keeping an eye on receivables and customer follow-up to get money in as quickly as possible.
6. Offer discounts to collect payments earlier.
If you don’t want to wait for normal net terms to pay out, then offer your customers a discount if they pay early. If employees are dealing with collections, then make sure you have guidelines that state their eligibility for discounts; and then enforce those standards strictly.
7. Extend payables where you can.
While you want to bring payments in as quickly as possible, work with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.
8. Spend only on essentials.
Part of your forecasting model should give you a strong view of the necessary expenses that are coming down the pipe. Outside of the most essential purchases, you want to minimize spending and eliminate costs that aren’t essential to your operation until you’re profitable.
9. Be smart about hiring.
It is fair if you don’t hire until you absolutely need to, but it’s better to engage in smart hiring. If you can recruit top talent, a highly skilled worker is likely to be able to tackle the work of two or more mediocre employees. You’ll probably spend a little more in salary or benefits to get that top talent, but that amount is still bound to be less than you’d spend on multiple employees covering the same task who make more frequent mistakes.
Another outcome is that they may quit on you, forcing you to start over. Be smart about whom you recruit if you must hire someone.
“The secret to successful hiring is this," says Marc Benioff, CEO of Salesforce. "Look for the people who want to change the world,”
10. Make the best use of technology.
Always back up your files and cash-flow spreadsheets, to secure cloud storage. Not only will this keep your data secure from local file corruption or data loss/theft, but it will also make it easier for you to gain access from anywhere you have an Internet connection. This is another situation where accounting software can come in handy.
1. Stay Organized
When it comes to managing your profit, it’s very easy to lose track of your accounts. That said, it’s easy to become disorganized very quickly. You must do whatever it takes to stay organized. That way you can easily track your progress and make changes wherever necessary. You can use digital accounting solutions like online invoicing and expense management. These platforms allow you to keep accounts receivables and payables organized and in the cloud. Once you find the right profit organizing solution (app or record keeping diary), then you should run quarterly check-ups on your finances. See what works what doesn’t and always look to improve.
2. Save When Possible
It is likely that your first venture won’t be a big success, and if you’re an entrepreneur you should learn to delay gratification. Saving could be hard for many reasons so the best thing to do is look at your spending habits. For starters map out a typical week of spending for yourself and categorize expenses as “must haves” and “nice to haves”. For example rent and food are must haves. The newest pair of Nike’s is definitely a nice to have. After you’ve budgeted for your must haves try to save as much of the excess cash as possible since you’ll never know when you need it.
Get Mentorship
As an entrepreneur, you must surround yourself with people who are smarter than you are. If you’re always the smartest in the room, you won’t grow. Find a mentor who has the financial foundation that you desire. If you want to become a billionaire, find one. If you want a stable job and a small apartment go find someone who has it. Also, don’t limit yourself to one mentor. In fact, the more you have the better off you are.
Managing your money is both a trying and rewarding experience. If you take the advice above to heart, you won’t regret it.
Photo Credit: Benjamin Dada, Unsplash
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