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  • September 23, 2016

How to Know If Your Small Business Is Profitable

Numbers. Who needs them?  Well, for starters if you’re a small business owner you’ll definitely need to make sense of it for the sake of running your company.

 

Every successful business owner is financially literate. They can accurately assess the health of their business on a monthly basis looking at all of the numbers in the Balance Sheets, Income Statements, and Cash Flows to determine their company’s current performance.

 

As a first step for any first-time owner,this latest blog entry will share some helpful tips to help you determine your company’s profitability.

 

Cash Based Accounting

 

Most small businesses choose this method of accounting when they are recording accounting transactions due to the simplicity of keeping track of their finances. Revenue and expenses are only recorded when actual cash is received from customers, or paid out to vendors and employees.

 

It will always show you how much you have available in your bank account, as this sample single entry journal shown below:

 

 

Date Transaction Revenues Expenses Balance
8/1/2016 Beginning Balance $5,000.00
8/2/2016 Water Bill -$20.00 $4,980.00
8/2/2016 Received money from customer $1,000 $5,980.00
8/4/2016 Bank fees -$2.50 $5,977.50
8/10/2016 printer ink purchased -$75.00 $5,902.50
8/25/2016 Half Payment Rec’d from Customer A $250 $6,152.50
8/30/2016 Last Half Payment Rec’d from Customer A $250 $6,402.50
8/31/2016 Ending Balance for August $6,402.50

 

Using this simple format, you can see how a company is doing financially, and how easy it is to do bookkeeping. Although if you have more than several employees and a much bigger volume of transactions than the example above, feel free to use Wave . This service is free, easy-to-use, and great for small firms and freelancers.

If you would like to do more research into Wave or other accounting software available, Business News Daily did a great job covering all of the latest and greatest software for small businesses in 2016.

 

Net Income/Profit

 

Diligently track your revenues and expenses to find out where you stand financially at every month-end. Most businesses in general, start out losing money in the beginning, but eventually your business can become profitable when revenues and expenses break-even–Wait? What??–Yes, you heard me right.

 

When your business arrives at the point when your revenue can cover for all of your expenses and your net income is zero, that means that your business is now able to sustain itself without support from your personal bank account. 

 

Eventually at some point you’ll want to have some extra money on the side like this :

 

Date Transaction Revenues Expenses Balance
8/1/2016 Beginning Balance $5,000.00
8/2/2016 Water Bill -$20.00 $4,980.00
8/2/2016 Received money from customer $1,000 $5,980.00
8/4/2016 Bank fees -$2.50 $5,977.50
8/10/2016 printer ink purchased -$75.00 $5,902.50
8/25/2016 Half Payment Rec’d from Customer A $250 $6,152.50
8/30/2016 Last Half Payment Rec’d from Customer A $250 $6,402.50
8/31/2016 Ending Balance for August $6,402.50
August Net Income (Loss) $1,500 -$97.50 $1,403

 

In all, a break-even point is a sign of a healthy, growing business. If you’re already breaking even then you’re already well on your way to becoming more successful. 

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