Many business owners simply “keep their books” because they have to. Bookkeeping to many businesses means simply recording transactions in a spreadsheet or software like QuickBooks. Or maybe they outsource their bookkeeping work to a person or bookkeeping firm. No one really examines these books (other than to record and reconcile transactions). The business owner just records information throughout the year and sends it to their accountant or tax preparer to do year-end taxes.
If this sounds even a little familiar, you are missing a VERY powerful tool to help make your business more profitable. Use professional bookkeeping techniques to boost your profits.
Chart of Accounts If you look at a basic profit and loss statement you see an “income” section and an “expense” section with more specific categories under each. The income section may have a very short list of categories such as “product income” and/or “service income.” But the expense section usually has a pretty long list such as “rent”, “utilities”, “office supplies”, etc. Each of these separate categories is a separate “account” and together they make up your “chart of accounts.” There are many other things included in the chart of accounts, but for purposes of this discussion we will keep it simple.
A Meaningful Chart of Accounts
The very first step to increasing your business profits is using account categories that are meaningful to your business.
In our illustrative example, our attorney has three income accounts; Speaking Fees, Legal Fees, and Book Sales. This is meaningful to his business as he can see exactly where his money is coming from. Imagine if he just had Service Income. All three revenue streams would be lumped together.
Marketing expense accounts are also commonly oversimplified with everything lumped into “Marketing” or perhaps two accounts called “Advertising” and “Promotion.” You could be spending money on Facebook, Chamber of Commerce membership dues, ads, business cards, brochures, trade shows, a website upgrade, and radio advertising. It’s more challenging to keep track of where your marketing dollar is actually going with all that lumped into only one or two accounts.
Specific Account Categories
Trending for Results
Now you have a chart of accounts that is not too specific and not too vague, but just right to be meaningful to your business. This perfect chart of accounts is of no use if you don’t measure it.
Trending financial data is a really simple concept. You look at an expense this month and compare it to last month. Did it go up or down? Why? Is that okay with you or do you need to do something about it?
When you trend ALL your income and expenses over 12 or more months, you start to see things you wouldn’t notice over just 2 months. You might see credit card processing fees or cost of goods creeping up. Go to another level of trending complexity by comparing different expenses to one another and income, over a longer period of time, and all kinds of things emerge.
Putting it All Together
Marketing is one of my favorite areas to look at and a great example of how this all works to increase profits. When you have a chart of accounts that breaks out all the different types of marketing you do, and you trend that over time, and compare it to one another AND income, you’ll start to see what works and what doesn’t. Now you can stop wasting money on things that don’t work AND put that money towards the things that DO work to increase profits!
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