Discover in 3 Steps – Is Your Business Really Earning?
Easiest Accounting for Non-Accountants
Are you managing a small business of your own and have no accounting background? Have you attended various seminars on accounting for non-accountants but still have no idea what they’re talking about? How will you know if your business is earning or not? Even if you see cash coming in, it doesn’t mean you’re really earning and that you can sustain the growth of your business.
If you have ventured on a small business of your own, then these 3 easy steps to know if your business is earning is definitely for you. By small business, I mean that aside from being its President and CEO, you are also the Vice President, the secretary, the salesman, the accountant, the security officer and even its janitor!
If you have this kind of business, you’ve probably experienced how hard it is to both handle the operations of the business and perform the back-room and monitoring activities at the same time.
Some people are able to pull it off, either by sheer luck or by a good combination of intuition and natural business skills. But many also fail because they are unable to see the true status of their business and thereby gear their efforts based from there.
How do you know if your business is really earning without hiring an expensive accounting service at the start of your business? Following is a simple way to determine whether you are incurring profits or true net losses.
1. Make a total of your earnings for the period.
As an example, add up all your earnings for the last 6 months. By earnings, I mean the money you received from sales or from the services you rendered, such as performing landscape services. We will call this TOTAL A.
2. Make a total of your cash outflows for the same period.
We will call this TOTAL B. Care should however be taken in this step because it is often here where people fail to include many items they are not aware of as having an impact in their business. Include the following:
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Fixed monthly expenses e.g. salary to a personal assistant, monthly rent, internet and phone bills, utilities such as water and electricity consumption. (These are more or less fixed in nature since they are to be incurred from month to month at a rather regular basis)
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Cost of goods or services sold. When you sell decorated lamps for instance, the cost of your goods sold is the combined cost of the materials used in order to build the lamp. This includes the lamp stand, the shade, the bulb, even the plug! It also includes any labor expenses incurred in designing or assembling the lamp.
If on the other hand, you’re not into selling products but services, like interior design services, the cost of your services is the fee you pay for yourself in exchange for the work you performed.
Note that this is different from the salary of assistants first mentioned above. Note also that the fee you receive from the work you performed is not the same as the revenue you made from your business.
Consider this. A business is not a job. When you have a job, you don’t spend anything for the business of your boss. You don’t pay for your office electricity. And you certainly don’t pay for his secretary’s salary!
But when you have a business, even if you’re the one performing the main work at the start, you take care also of all the costs of your business.
Also, if you wished to, you could have just assigned that work to someone else who’ll be working for you. If this happens, what money will you receive from your business then?
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Proportionate expense for your furniture, fixtures, equipment and other big and costly assets that you acquired. Why proportionate? Because assets like these that you buy at the start of your business are not likely to be bought again the week or month after they’ve been bought. They are usually used for many years, hence compute only the relevant proportionate amount for the period (say 6 months to be consistent). How do you compute this?
Total Cost of Asset x Period Used (in years) = Expense
Useful Life (in years)
Example:
$ 5,000 x 0.5 years= $ 500
5 years
3. Finally, deduct Total B from Total A.
Total A – Total B = Profit (Loss)
If it’s a positive figure, CONGRATULATIONS! Your business seems to be doing well and earning. If on the other hand, it results in a negative figure, don’t worry. It doesn’t necessarily mean that you should give up. But you can assess your situation from there and make wiser decisions based on your current business position. Good luck! I wish for you the best.
You can download a PDF Copy of this article HERE for free for your reference or for use of a friend!
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Stephenie Desano
