Small businesses will thrive better if business owners actually kept their records well. Lots of SMEs fold up barely months after opening up not because they aren’t making enough sales, but because they are not maximizing the profit they make. And how exactly can you maximize your profit if you do not even possess an accurate record of exactly how much profit you make?
Keeping track of your profit and loss in a small business is not really difficult. The problem lies in whether the business owner thinks that the keeping of the profit and loss records/accounts are actually necessary.
Most small business owners believe they can either avoid keeping records at all or just do it minimally instead of adhering strictly to actually keeping their records.
However, if you fail to realize the benefits that accrue to keeping your records then you will miss out on all the gains of record keeping.
A profit and loss report shows how profitable your business has been over a specific period of time. The time is usually not specific as it can be monthly, quarterly or annually.
THE EASY WAY TO KEEP TRACK OF PROFIT/LOSS IN SMALL BUSINESSES
You do not have to become a mini-accountant in order to keep correct accounts for your business. Here are some steps:
Open A Bank Account For Your Business: Do not make the mistake of stashing your business finds in the same account as your personal bank account. Putting them in the same place will give way to the temptation of spending your business funds intentionally or not. Even in cases of emergency, keeping your business funds in a separate account will ensure that it will be your last resort instead of your first.
In essence, keep your business money away from your personal money - do not make the mistake of mixing them up for any reason at all.
Track Your Expense and Every Little Dime That Leaves Your Business: Never think that an amount is so insignificant or replaceable that you forget to account for it. Even if it is replaceable, recording it ensures that you remember when you took it out and for what reason and this helps to remind you to actually replace it.
Also make you record when you replace such funds, record amount taken out for expenses and specify exactly what it was used for, down to the last penny. Take note of recurring expenditure too.
Hold On Tight To Your Receipts: This cannot be overemphasized. Receipts are proof of payment so even when you do not remember a particular purchase/supply, you can always refer to the receipt to juggle your memory.
Don’t ever discard a receipt no matter how little an amount it shows. You never know when it comes in handy.
If You Are An Employer, Set Up A Payroll System: This is not as difficult as it sounds. All it means is that once you hire someone whether it is a painter for your shop or a carpenter to repair something - full time or part time employee create a record system for this. This will document what service they rendered to you, the cost of the service and what you paid to them in form of wage/salary. Note that while this can appear in the normal day to day records, there should be a separate one for it as well.
Know Your Profit Margin: What is the cost incurred to get that product that you sell? What price do you sell at? How much is your profit? Is it constant? Do you push up your selling price when the cost price goes up? Or so you incur a loss for the sake of your customers?
Answering these questions will help you to know what is needed in order to decrease your cost and increase your profit since you now have the right figures to work with.
At Intervals, Re-Evaluate Your Record-Keeping Methods: You can’t use one method forever. There is always room for improvement so you have to find the loop holes in your record-keeping system and fix it so that it serves you better and saves you time which you can invest into your business. Remember, time is money.
Keeping your profit and loss account is very useful for a number of reasons.
Firstly, it can be used to monitor the business activity to help you know what’s happening in the business.
It highlights the high points and the low points of the business; where the business is really thriving and where it is barely above the water.
If an investor wishes to invest in a business, it is the business account that will be used to measure or gauge the financial health of the business and how much they will gain from their investment in the business.
Record keeping ensures that you can always go back and check a particular business transaction if you feel something is missing. That way, you don’t have to second guess yourself in anyway since you have the accurate records at your fingertips