Do you think that calculating business profit is just about subtracting expenses from income? Well, it’s actually more complex than that. Factors like your accounting, budget and bookkeeping all play a role in whether or not your finances are at a loss or profit. Making use of a bookkeeping service Atlanta knows and respects can help Georgia business owners to stay on top of things.
Bookkeeping refers to the basic, general recording of financial numbers, while accounting is a more indepth, complex and analytical way of assessing business finances. While recording billed invoices and accounts paid is one thing, projecting unpaid receivables and bad debt as well as calculating future interest amounts are more advanced accounting considerations. Factoring in the following four considerations will help you to determine if your business is REALLY making money:
1. Interest Costs
If you are or will be making business purchases using a loan, or if you carry a balance on your business credit card, remember to include interest, fees and financing costs in your expenses category and budget. Not doing so will give you a skewed picture of your profits and progress. Be sure to comparative shop for interest rates and consider using business cash reserves to pay down debt (if possible) and avoid interest costs.
2. Using a Cash Flow Budget
A single master budget with projected income and expenses may not be enough to give you an accurate picture of your whole financial year. Consider creating a cash flow budget in addition to your master budget to map out when major flows of income as well as expenses will come in. A cash flow budget can help you manage and anticipate debts and shortfalls. A bridge loan might be necessary at a certain time of year, but if you know these junctures are ahead, you can manage your cash flow to avoid paying interest on a loan. Be aware that these occurrences can also skew your financial picture, so stay abreast of the true scope of things by factoring in these anomalies throughout your business year.
3. Hidden Personal Costs
Are you spending a lot of your own cash and running up personal debt in order to maintain your business? Even if your business is profiting on paper, you must at least theoretically consider these costs in the final totals. You might even consider working a part-time job to offset any personal spending and pay down debt; staying on top of this could save you a considerable amount of money in interest charges.
4. Factoring in Bad Debt
A sad truth in business is that not every client will pay you, especially if you extend net 30 day payment terms. If a customer goes bankrupt or otherwise refuses to pay you, this could potentially cut your profits substantially. In addition to losing the money on the sale, you’ll also have materials, expenses, marketing, labor and overhead costs to cover in creating and selling the product. When calculating profit/loss, estimate bad debt percentages by looking at past years and reducing projected receivables by that amount. (This number is usually between 5 and 10 percent on average for most business sectors.) You can also take steps to offset bad debt by requiring pre-payment for all goods and services and tightening up your returns/refunds policy.
Calculating profits and losses is far more nuanced and complex than just subtracting your expenses from your income. Don’t forget to factor in these four areas in order to gain a more accurate assessment of your financial picture. If you’re still not confident you’re calculating your bottom line correctly, consider enlisting the help of a bookkeeping service Atlanta knows and trusts. A professional bookkeeping and accounting service can help to ensure you are doing all you can to reduce costs, maximize profits and retain an accurate assessment of your bottom line.