Small business owners often adopt an accounting system (or bookkeeping system) for the sole purpose of determining profit. The concept seems pretty simple, but there is much more information that can be gleaned from a good accounting system than just the amount of money coming in.
It's More than Simple Subtraction
The ability to determine profit starts with the diligent tracking of income and expenses, but an accounting system should provide insights beyond simple subtraction. Business owners should be studying their profit and loss statement to identify ways to increase profits. Which products or services are best sellers? Which customers purchase the most? This is the sort of information that will help to fuel profits in the future.
Keep in mind that reports can be relatively useless without a point of comparison. Compare profit findings from period to period. Are there any trends?
Most of us are setting goals, but how can we track the progress? How should company money be spent? Is it a good year to purchase new equipment or take a big business trip? The proper accounting system is crucial to answering these questions. Business owners who possess a firm understanding of profit (the amount, its sources, etc.) are better equipped to manage cash, minimize tax liabilities and achieve sustainable growth.
In Review: Tips for Determining Profit
- Diligently track income and expenses.
- Subtract expenses from income.
- Determine the best sources of income (i.e. which products/services are best sellers and which customers are buying the most).
- Compare findings to previous periods. Look for trends.
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