As a business owner, you may know just how much gross income your business makes in a month, but do you know just how much of that is purely profit? Probably not. Stepping into the world of accounting isn’t easy. It’s tough and takes a lot of effort. However, as a business owner, you have to do it as there are many benefits to be had if you have a good understanding of even just a few of the accounting measures that reflect the health of your business right now and going forward.
The Profit & Loss Statement
Also known as the income statement, the profit & loss statement displays your costs, revenues and expenses for a particular length of time. It’s the best way to get a clear idea of your net income, which is what business lenders and investors are looking for because it shows how much money your business has made or lost during the fiscal period. The taxable income of your business is also entirely dependent on your net income.
By definition, the gross margin is the sale price of a particular product minus whatever it cost to get a chance to sell it. For example, your business sells fruits at a cost of $1 per piece. You buy it from your supplier at half that price ($0.5) and are charged a quarter of your intended price ($0.25) per piece of fruit for packaging. In total, you spent $0.75 to sell the product, leaving your gross margin at $0.25.
Mind you, that $0.25 isn’t your clean profit just yet. You also have to consider just how much your business spends a month in rent, utilities and salaries. Only by adding up all of your expenses can you know just how much pieces of fruit you will need to sell to cover all of your business’ overheads and make profit.
Once you know just how much units you need to sell, you can then start making plans about what you can do about your profit going forward – buying more to get a cheaper price, advertising, expanding, etc.
Subsequently, if you know it’s impossible to hit the level of sales you need to cover your costs, you can start thinking about how much you’ll need to increase the price of your units, or how you can cut costs on your other expenses so as not to affect your sales price, or if you can sell another product to help offset your business’ overall costs.
Calculated after taking your total net profit after tax expenses and dividing it with your sales, the profit margin is a useful measure that can help you estimate just how much profit you are going to make on future sales.
Keep in mind that the estimates are not always 100% accurate. But, then again, they’re not far off from the actual value either. The main takeaway here is that you can use this measurement tool to make decisions going forward, as well as to check if your business is able to properly maintain its profit margins so you know how to improve it if necessary.
Cash Flow Statement
This is similar to your Profit & Loss statement, only more comprehensive. This is because the cash flow statements show everything that’s going in and out of your company, including non-cash transactions. This makes for a clearer view of just how your company spent its money during a particular period of time.
This is extremely valuable data that can teach you where and how your business is making money and what kind of choices you’ve made regarding expenses.
It’s not easy to immerse yourself in your business’s accounting side, but that’s why you must choose to work with firms that provide the best accounting services in Singapore. By making sure your company’s books are handled by the best, rest assured that not only your company’s finances are safe, but that you’re working with a group of people who’re willing to guide you to become a more savvy business owner every step of the way.