For some business owners, the answer to this question may seem simple. Business owners all define profitability differently. While some business owners define profit as money in the bank, others that experience difficulty with cash flow see it as a loss.
At times, business owners see profitability as the amount of invoices and billable income they generate regardless of cash flow. In other instances, if the business has money in the bank and can pay for its obligations, then that business owner has the illusion that their business is profitable.
Having a dedicated team of accounting professionals handling your bookkeeping and periodically reviewing your data can tell you a whole different story.
Although it is not complicated, to make it simple to identify, a company generates profits when its sales are greater than its expenses. Before we arrive at profitability and determine if we have enough money in the account, you must incur various types of expenses. This is where the process of building your financial statements via bookkeeping comes in handy. When we talk about expenses, we mean everything you have to pay for or invest into to have a product or service ready to be exchanged for payment. These items include everything from payroll, inventory, rent, utilities, computers, and all the overhead associated with maintaining your business.
Did you know that supplying coffee in the office is part of the overhead expenses you incur as part of doing business and you may not realize it!
A good bookkeeping and accounting service will be in charge of classifying all the expense transactions from the business accounts and provide monthly, quarterly or yearly bookkeeping reports you can use to evaluate the health of your business. This also confirms if your business is on the right track. Monitoring your business activities during the year is the perfect way to ensure that you are taking advantage of all your deductions, listing all the operating expenses of the company and determining how profitable is your business. Think of bookkeeping as a road map.
For some business owners it is difficult to visualize what their expenses add up to. Most business owners do not know if they have a profit or a loss until the end of the year when it is too late to make any changes or when they are presented with a large tax bill. As a good practice, a business owner should invest on their business and consider partnering with an accounting firm that handles their bookkeeping tasks and keeps them informed. This will give you more time to focus on the growth of your business, the sales and other tasks and ensures that at the end of the year the you are prepared. Knowing the numbers your business generate can give you an advantage over your competitors and help you scale your operating with ease. At Columna Agency we partner with our clients so they know their numbers and their business inside and out.