Big corporations have finance departments that can generate all kinds of crazy financial reports to help leadership understand the state of the company, but small online businesses only need one report, and that’s the profit & loss statement. If you aren’t creating a profit and loss statement each month to track your business’s health, then this is the episode for you. If you’re interested in the program I mentioned in the episode (The Shift:Small Business Edition), sign up for our free masterclass at evolvedfinance.com/shiftmasterclassregistration.
When Corey and I talk to prospective clients for the first time, we frequently have to explain to them that Evolved Finance is not an accounting firm. This confusion is understandable, as most online entrepreneurs don’t engulf themselves in the financial aspects of running a business. The majority of entrepreneurs will hire an accountant at the end of the year and then hope for the best.
If you’re unclear about the difference as well, you are in luck! We want to clear up the confusion and explain how bookkeepers provide a much different service than your accountant.
What does a bookkeeper do?
Let’s see how Wikipedia defines bookkeeping:
“Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation.”
This is a nice and concise definition of the role bookkeeping plays in a business, but it still might seem a little foreign if you’re not familiar with the financial side of your business. Here are the basics of what you need to know about bookkeeping.
- A bookkeeper collects and records all of your business’s financial data using accounting software like QuickBooks. These financial data include all of the transactions that occur in your various business accounts (checking, savings, PayPal, credit cards, etc.).
- Once your financial data are recorded into the accounting software, a bookkeeper will then organize these data so you and your accountant can more easily see:
How much revenue your business generates before expenses (your gross revenue)
How much money your business spends on expenses such as rent, utilities, software, advertising, etc.
How much profit your business makes (profit = gross revenue – expenses)
- A bookkeeper will also make sure that your financial data in QuickBooks match up with the transactions occurring in your bank, credit card, and merchant accounts. This is called “reconciling” an account and it’s usually done on a monthly basis.
- Once all of your accounts have been reconciled and your transactions organized, the bookkeeper can then generate a profit and loss statement (P&L), a basic financial report that shows your revenue, expenses, and profit.
Hiring a bookkeeper isn’t just for tax purposes. The financial reporting a bookkeeper can provide (like your P&L) can be hugely valuable for managing your business more effectively. It’s so much easier to make decisions when you have clear financial data to utilize.
What does an accountant do?
The main service an accountant provides is the actual filing of your taxes. An accountant will take the financial data your bookkeeper has compiled and use it to file your taxes.
Here are the five main ways an accountant can serve your business.
- An accountant will file all the necessary paperwork with the federal government and your state government during tax time.
- An accountant will provide advice and guidance around what expenses you are able to write off for the business.
- An accountant can help you estimate your tax bill throughout the year. They can also file estimated payments for you every quarter if you’d rather not wait.
- An accountant can provide general guidance around building a tax strategy that will limit your tax liability while also ensuring you stay within the confines of state and federal tax laws (very important when your business starts generating six or seven figure revenue).
- An accountant can help you through an audit with the IRS.
Accountants can provide some other services as well, such as helping you to create a business entity or setting up a payroll system for your employees. Not every business needs these extra services, but all businesses – making any amount of revenue – need a tax professional to make sure their taxes are handled properly.
If you have aspirations to grow your business in a significant way, establishing strong financial practices early on can make future growth so much easier to handle, especially as the business becomes more complex and the IRS starts to want a bigger cut of your profits. A strong financial team can significantly reduce stress around your taxes and finances while also freeing up your time to focus on driving revenue and managing your team. Don’t wait until you’re in tax trouble to get professionals involved in your business.
We get it. Finance is hardly the most fun aspect of running your online business. It takes you away from creating products, driving sales, and managing marketing efforts. That’s the fun stuff that leads to cash flow and sweet entrepreneurial glory. However, as you’ll hear us say time and time again, generating revenue is only half the battle. If you want stability and growth, you need visibility into the operational and financial aspects of your business. The only way to achieve this level of clarity is to utilize the financial data your bookkeeper is organizing for you.
With our clients at Evolved Finance, we go over their P&L (profit and loss statement) with them every month so they can see exactly how much money they made and how much money they spent. Seeing this data opens their eyes to a side of their business they simply weren’t in tune with before. If your bookkeeper isn’t sending you a P&L every month, or you’re not taking the time to look at it when they do send it, you’re missing out on valuable insights into your online business.
Knowing where you stand financially allows you to make critical adjustments to keep your business healthy and thriving.
Looking at the P&L every month allows you to find potential issues before they become big problems. While there is no question that trusting your instincts is important as an online business owner, running a business solely on instinct is not wise. You might have a general idea about your cash flow for any given month, but once you see the actual numbers in front of you, it becomes apparent where you can make adjustments to correct profitability issues.
Additionally, you don’t need to have a master’s degree in finance to recognize obvious overspending. If you can see how much total revenue your business generates every month, as well as how much you’re spending to keep it running, it becomes pretty obvious where cash is getting chewed up. You can then make the necessary adjustments to your spending and/or operations and get your profitability back on track.
You can’t plan for future growth if you don’t know how much the business is actually making.
Growing pains are part of building any business, but knowing what to do when they happen is another story. Without financial clarity, it can be tough to determine where you need to invest to better support the influx of business. That’s where utilizing your P&L can be a huge help, allowing you to answer questions like:
- Do you have enough cash flow to hire another employee?
- Can you afford to overhaul your website and e-commerce platform?
- How much can you really increase your advertising spend?
- Will you have to take a cut in pay so you can further invest in the business?
Here’s another way to look at it:
If you were to take a cross-country road trip from Los Angeles to New York City, I imagine most of you would grab a map and use that to plan out your trip. You would probably do this for two reasons: 1) you wouldn’t want to get lost and fail to reach your destination, and 2) you’d want to take advantage of any sights or special locations along the way. This is in essence why having financial clarity is so important for the future growth of your business. Without it, you’re essentially traveling without any sort of a guide, putting yourself at risk for getting lost and missing out on key opportunities to grow.
Seeing your business making money is satisfying!
Entrepreneurs love looking at their numbers when they’re making money. It is both satisfying and motivating to look at your P&L and see that your hard work has paid off. You also get a warm and fuzzy feeling when you see that the business you have created is supporting the livelihoods of others, be it full-time employees, part-time employees, or independent contractors. Obviously, you don’t want to shamelessly bask in your success, but it’s meaningful to know when you’re doing something right. It’s important to not only develop a sense of pride in the amount of revenue you generate, but also in the community of people your business supports.
And, sometimes you need a dose of the truth.
We talk to almost every one of our clients at Evolved Finance on a monthly basis. Sometimes those conversations aren’t easy. If one of our clients sees a negative number at the end of their P&L, meaning they spent more than they made, it’s usually a big wake-up call. They typically know that they didn’t have a good month before we get on the call, but looking at the actual numbers allows them to see exactly why the business lost money for the month. It might sting at first, but our clients tend to bounce back more motivated and focused to get their business back on track.
If you’re lacking financial clarity in your online business, you can make that change. Whether you need to hire a bookkeeper or you need your current bookkeeper to start sending your P&L to you every month, gaining the financial clarity you need to manage your business more confidently and with better insight is just a matter of making it a priority. It could provide the perspective you need to developing a more reliable and stable online business.
When entrepreneurs start making money for the first time with their online businesses, the last thing they want to do is worry about bookkeeping. After all, they’re enjoying the high of finally generating revenue, so why ruin it with thoughts of balance sheets and income tax? It’s such a buzz kill!
If you’re an online entrepreneur and your business is starting to generate revenue, it’s really important that you get your finances in order as soon as you can. Good bookkeeping practices are the foundation to accomplishing this. It might not be as sexy as managing your sales funnel or running your social media campaigns, but establishing good financial practices in your online business can mean the difference between thriving and simply getting by.
If bookkeeping is a new concept to you, or you’ve never really understand the full benefit to having good bookkeeping practices in your business, the five reasons we’ve shared below should make it very clear why bookkeeping can make running your business less stressful and provide some real benefit.
1) You shouldn’t be spending your time doing bookkeeping
As an online business owner, there is enough work to do as it is, so why add bookkeeping to your list? The best thing you can be doing for your business, no matter what stage you’re at, is focusing on driving revenue, which is why reconciling your bank accounts every month is hardly the best use of your time. Plus, unless you have previous experience doing bookkeeping, you’re probably making mistakes that will need to be fixed by your accountant, which means more billable hours they’ll ding you for when tax time comes around.
2) Monthly bookkeeping makes your accountant bill cheaper at the end of the year
Hiring a bookkeeper is actually going to make your accounting bill at the end of the year cheaper. By working with a bookkeeper every month, your finances are organized and ready to go for your accountant when it comes time to file your tax return. That means he or she doesn’t have to round up all your bank statements or sift through your homemade spreadsheet to try and figure out how much your business made. Additionally, when a bookkeeper is maintaining your books throughout the year, the data will be much more organized and accurate. Having your accountant try to get everything done right at the last minute (especially when they’re trying to do the same things for numerous other businesses at the same time) leaves a lot of room for mistakes and missed tax write-offs.
3) It’s easier to estimate your taxes during the year
Does the thought of your tax bill keep you up at night? If you’re one of the many entrepreneurs who stress about what they will owe the government at the end of the year, it’s because you don’t have accurate financial data for your business! When a competent bookkeeper reconciles your accounts every month, it becomes ridiculously easy to look up how much profit your business has made. With that kind of visibility, estimating your tax bill is something you can keep track of month-by-month instead of waiting until the very end of the year.
4) Real financial data helps you make better decisions for your business
A lot of online entrepreneurs think that bookkeeping is just for tax purposes. This is a perception we’re trying to change at Evolved Finance, because although bookkeeping is definitely a way to keep yourself out of trouble with the IRS, it’s also the most valuable tool for monitoring the health of your business so you can make better strategic decisions. When you’re able to clearly see how much revenue you generate every month, and exactly how you’re spending your money, it becomes obvious where potential problems and opportunities lie. If you wait until the end of the year to have your accountant compile all of your financial data, you’re missing out on an opportunity to utilize valuable information that can help you make smarter and more informed decisions.
5) You’ll be better prepared for an audit
The “a” word is any business owner’s worst nightmare, but it really doesn’t have to be. The IRS performs audits on business owners and corporate entities all over the country every year (around 1-1.5 million audits), and if you’re one of the unlucky chosen, there is really no reason to stress if you have good bookkeeping practices. When your books are clean, organized and properly maintained, it becomes far less grueling and painful for the IRS to see the state of your business and make sure you are not underreporting your income or overstating your expenses. Any bookkeeper worth their salt is going to have organized financial data on your business that will show the IRS that you’re playing by the rules.
Remember, the need for a bookkeeper is good! It means your business is making money, and that’s a beautiful thing! Don’t wait until your finances are a mess or the IRS is knocking at your door. You’ll not only sleep better knowing tax time will be dramatically less stressful, but you’ll start thinking like the CEO you need to become in order to make your business more stable and reliable.
There is something about running an online business that makes many online entrepreneurs feel like they don’t need to utilize the same practices and tools a more traditional business would utilize. Financial reporting is one of those areas.
When it comes to reporting, online business owners tend to rely more heavily on website and sales analytics than traditional financial reporting. Now don”t get me wrong, these reports are very important tools for analyzing any online business, but the one financial report every online entrepreneur should be looking at every month is their profit and loss statement (also known as the P&L or income statement).
The P&L is one of the most useful tools that can be used for analyzing the health of a business. It offers a clear snapshot of how much money is coming in and how much money is leaving over a given amount of time, usually viewed in months or years. With some simple addition and subtraction, the final number at the end of a basic P&L is the net profit (be it positive or negative). The net profit, or the “bottom line,” is a quick and easy measure of your business’s profitability.
In order to generate a P&L for your business, you need to have good bookkeeping. Seeing how Evolved Finance is in fact a bookkeeping firm for online businesses, it would be easy to understand why we hard-sell the importance of utilizing the information found in a P&L, but there are truly some legitimate reasons why you should be talking to your bookkeeper about generating this report for your online business on a monthly basis.
It’s the Pulse of Your Business
There is no better way to see and understand the health of your online business than by using a P&L. Sure, your CRM might be able to tell you how many units you’ve sold or how many subscribers you have, but the only way to know exactly how much money you’re making every month, every quarter and every year, is through the use of your P&L statements.
It’s One of the Reasons You Pay a Bookkeeper to Reconcile Your Accounts
Sure, the primary reason most businesses hire a bookkeeper is to record their transactions for taxes purposes at the end of the year. However, having access to valuable financial data on a monthly basis and not utilizing it is a disservice to the business. If you’re paying a bookkeeper to reconcile your accounts, and they’re not already sending you a P&L after the end of each month, you need to request that they start doing so immediately.
It’s a Very Straightforward Report to Understand
Just hearing the term P&L sounds very “financey,” which scares away a lot of online entrepreneurs because they think It’s going to be too complicated to understand. The reality is a P&L statement is pretty straightforward to review, especially when It’s for your own business. With a little time and with some help from your bookkeeper, you can easily become P&L literate for your online business.
As mentioned earlier, talk to your current bookkeeper and have them start to email your P&L once a month. If they’re open to it, hop on a call with them to review it together so you can not only learn more about what the numbers mean, but also to help your bookkeeper make sure they’re categorizing your income and expenses properly. It’s an easy way to catch mistakes and gain insights into your finances at the same time.