What you see on the surface isn’t a reflection of how your company is performing. What reveals an accurate picture of your business are those business accounting numbers in your accounting books.
Financial records show which decisions set you back and which helped you grow. They’re a reflection of your disappointments, successes, and lessons. How well you collect these data and how you analyze them actually play a significant role in your company’s momentum.
The problem is that trying to figure out what you really need to look at while trying to manage your company simultaneously can be confusing and discouraging. It holds even for the most experienced entrepreneurs out there. In fact, most owners either simply don’t understand what the business accounting numbers mean or fail to look at them regularly. They do a lousy job of examining the pieces of information they could easily find from their accounting system’s financial reports. It makes sense why a lot of companies turn to websites, like pagekirk.co.uk, for professional accounting services.
Take the time to really familiarize yourself with the six key business accounting numbers below to help you ensure that your company stays in the black.
This figure is computed by subtracting operating expenses from the cash your business generates during its regular activities. Operating cash flow is what offers a bird’s eye view of your company’s economic state. It adjusts for working capital, like inventory and receivables, and includes depreciation to your net income. A sign that you’re actually operating in the black is when your business cash flow exceeds your cash outflow. However, it’s time to really take a closer look at your expenses and income if the reverse is true.
The gross profit of a company is the total money earned minus the COGS or cost of goods sold. COGS are the expenses that go directly into items. Now, find net profit by subtracting allowable business expenses from the gross profit. It shows the profitability of your business during a certain period. Expenses include operating costs, like shipping expenses. Expenses also cover overheads, such as utilities.
You need to report your net business profit on government legal documents and forms. By calculating the net profit of your company, you can also figure out exactly how much to pay yourself as a reward for your hard work. Additionally, if you want to gain capital, like startup business credit cards and small business loans, you must show a net profit to your prospective lenders.
Many companies set goals, but end up taking on more debt due to the lack of effective business plans. It’s absolutely critical for your company’s success to make realistic short-term and long-term plans for the future. To do that, you must always explore the profit and loss of your business to project earnings. It can help you predict your success and allow your company to gradually grow. Profit and loss are figures you’ll find on your P&L statement. They show the income of your business, which includes sales and revenue, minus quarterly or yearly expenses.
When break-even point happens, you don’t turn a profit or loss of money. It’s when the income of your business is equal to the expenses. The break-even point is useful in figuring out how many items you need sold to make a profit. Divide fixed costs by the selling price and, then, subtract variable costs from the result to find the break-even point.
This figure is one of the most critical business accounting numbers you should know about. It makes sense, given that generating sales is the number one reason entrepreneurs operate businesses. It’s important to pay attention to your sales. You must react quickly to an increase or decrease in sales. Determine why business is good when your company is on an upward trajectory, and find out the things you need to keep doing to effectively sustain the growth. In the same respect, a dip in sales could be a warning sign of serious trouble, allowing you to find solutions to problems.
If gross margin is low and doesn’t cover the monthly expenses of your business, such as marketing, utilities, and salaries, then, chances are you’re not charging your customers enough for your product. Gross margin refers to the amount of money left after subtracting the merchandise cost from the selling price. For example, if you’re buying a computer for $400 and selling it for $600, then, your gross margin is $200.
Keeping an eye on your business finances will give you that precious peace of mind. Understanding your business accounting numbers may not excite you as making a big sale, but they give you a glimpse of what the future really holds for your business.