Making a profit is vital for every business. It is what keeps a business going and helps it grow. Without making a profit, a business will eventually fail. The profit motive drives business owners to succeed, innovate, improve efficiency, and offer better products or services than their competitors, thereby attracting and retaining customers more effectively. Successfully managing finances and making a profit requires expert bookkeeping for small businesses.
The Three Primary Financial Statements Used to Measure and Manage a Company’s Condition
Smart business leaders use three primary financial statements to measure and manage their company’s financial condition: The Profit and Loss Statement (also called the P&L Statement or Income Statement), the Balance Sheet, and the Statement of Cash Flows.
Effective bookkeeping for small businesses brings these three statements together to provide valuable insights into a company’s financial performance.
Understanding the Profit and Loss Statement
The Profit and Loss Statement provides a clear and concise picture of a company’s financial performance over a defined period. The Profit and Loss Statement has the following components:
- Revenue. This area includes operating revenue from sales, gross receipts, and fees. Secondarily, non-operating revenue is listed, including interest, investment returns, and sales of property or equipment.
- Cost of Goods Sold (COGS). A company that sells goods must calculate the cost of goods sold (COGS). This is the cost of inventory or materials to create products.
- Expenses. This area includes all expenditures to operate a company, including advertising costs, employee salaries, benefits, and payroll taxes, interest expense, office supplies, payments to vendors and contractors, and professional fees for accountants, attorneys, etc.
- Gross profit. This is the difference between revenue and the cost of goods sold.
- Net Profit or Loss. After calculating any taxes due and subtracting the total from pretax income, the resulting amount will be a company’s net profit or loss for a period.
Analyzing a P&L statement can be done horizontally, by looking at changes over time within a particular line item. Vertical analysis focuses on the relative size of expense items compared to a company’s revenue. Professional bookkeeping for small businesses makes all financial statements reliable and useful.
Bookkeeping for Small Businesses
Bookkeeping for small businesses is the process of recording, organizing, and categorizing a business’s financial transactions, including the day-to-day movement of a business’s cash and expenses. But professional bookkeeping goes beyond disciplined and accurate data entry. Rather, it is the basis of accurate financial reporting, data-driven financial reporting and reliable tax preparation. It is the foundation of financial success.
A professional bookkeeper will gather and assemble every document that shows how money flows through a business, including invoices, receipts, and bank statements. They will organize all business transactions using a chart of accounts. They will match and verify transactions. And they will generate clear and reliable financial statements.
Seek Professional Accounting Assistance
Contact Irongate Financial Partners, based in Charleston and serving small businesses in South Carolina. We provide bookkeeping, financial analysis, and outsourced accounting services. Some of our major client categories include construction companies, restaurants, HVAC and home services companies, and medical practitioners. We aim to empower growing small businesses with accounting and financial insights and services that otherwise might be out of reach.