“Managing the Profitability of My Business: Learn,” Starting and Growing My Business for Self-Reliance (2017)
“Managing the Profitability of My Business: Learn”
Learn
Maximum Time: 60 Minutes
1. The Importance of Keeping Written Records
Read:
“How Is My Business Doing?” (see the script at the end of this section)
Discuss:
What lessons do you learn from Jack’s business experience?
Read:
Successful business owners are well organized and keep track of their financial details. For your business to succeed, it’s essential that you keep good financial records. Without good records, how will you know if your business is profitable? How will you know if you’ve been paid by all of your customers? How will you know your total expenses?
In this chapter, we will learn about the importance of keeping good financial records. We will learn about the term revenue, which refers to the money a business receives from selling services or products to customers. We will also learn about the term expense, which refers to the money spent by a business to obtain services or products. During the week, we will track our business revenue and expenses to see if we are making a profit.
2. The Habit of Keeping Records
Read:
Successful business owners keep daily records. For new business owners, this can be a difficult habit to establish, but it’s important. Here are five strategies for record-keeping success:
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Remember the “why”: You can find motivation by thinking of the long-term benefits that will result from operating an organized business with good records.
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Develop new skills: You may need to develop new skills to succeed at keeping records. Our discussion today will help you learn those skills.
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Choose friends, not accomplices: A friend is a person who helps you do the right thing. An accomplice is someone who helps you do the wrong thing. Ask trusted friends, a mentor, or your spouse to help you be consistent in keeping records.
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Use rewards: Reward yourself for keeping daily records.
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Get the right tools: Make sure you have the tools to do the job right. We will learn about some effective record-keeping tools later in this meeting.
Discuss:
Which of the strategies listed above will be the most helpful to you as you develop the habit of keeping daily financial records?
3. Keeping a Revenue and Expense Log
Read:
A revenue and expense log is a common and important business form. The main purpose of the log is to record every time money comes in and goes out of your business. Another purpose is to help you keep business and personal finances separate (see chapter 7). Decide whether to keep this log on paper or on a software application. It’s essential that you use it every day.
4. Keeping an Income Statement
Read:
After you have created a revenue and expense log, you can create an income statement. An income statement is also called a profit and loss statement or a P&L.
Remember how hard it was to calculate profit from memory during the activity in section 1? An income statement will help. It adds up all the entries from the revenue and expense log to summarize sources of revenue and expenses for a specific period, such as a week, month, quarter, or year. The income statement indicates whether your business is profitable during that period.
An income statement shows:
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Revenue
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Expenses
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Profit (or loss)
Read:
Notice how the purpose of the income statement is to aggregate all revenue and expenses into categories. You may have dozens, hundreds, or thousands of entries from your log that get summarized in the income statement. Once you understand how an income statement is organized, you can begin to study and analyze it to gain insights that will help you improve your business.
Discuss:
What insights can you gain from studying an income statement?
5. Creating a Revenue and Expense Log and an Income Statement
Read:
To know if your business is profitable, you need to create an income statement. To create an income statement, you first need to have a revenue and expense log.
Discuss:
Successful business owners rely on the power of record keeping. Does anyone in the group currently keep revenue and expense logs or produce income statements? If so, share how this has helped you.
Read:
You have now learned the importance of keeping a revenue and expense log and the basics of preparing regular income statements for your business. As your business grows, your income statements will likely become more complex. They will need to include other revenue and expense items, such as those listed below:
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Interest income
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Non-wage employee expenses (such as health insurance and payroll taxes)
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Marketing and advertising
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Rent
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Utilities
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Depreciation
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Insurance
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Interest expense
Don’t worry if you’re not familiar with some of these terms. You may want to reference the glossary for more information. As your business grows, you will want to become familiar with these terms and how to account for them in your income statement.
6. Tool for Managing the Financial Details of My Business
Read:
You need to use a comprehensive tool to manage the financial details of your business. Use this tool to record every revenue and expense transaction for your business. Ideally it should have a reporting capability to summarize revenue, expenses, and profitability. To help you make a daily habit of keeping your business organized, your tool should be easy to use and accessible.
Some business owners start by using a notebook and folders to record their receipts daily. These owners take their notebook and receipts and enter revenue and expenses into a spreadsheet every night. Most owners will progress to more advanced record-keeping tools, such as digital applications (apps) and software packages, as their businesses grow. Some owners also hire accountants to manage their finances.
Discuss:
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What tools are you aware of that can help manage the financial details of your business?
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What are the most useful features of the tool you recommend?
Read:
As a business owner, you need to decide which tool or resources will best help you record your revenue and expenses. Although a tool or an accountant will help with much of the record keeping, you need to understand the financial records of your business and review them continually. As your business grows, you will want to deepen your understanding of financial matters.
Starting today, record your revenue and expenses each day. At the end of the week, create an income statement for your business. (If it’s helpful, use the blank forms in “Resources” at the end of this section.) If your business doesn’t have financial data yet, create data for a fictitious business. The habit of recording all your revenue and expenses will benefit your business.