Turbocharge Your Know-How With Profit Centers

Entrepreneurs depend on knowledge to succeed. They excel at maintaining their professional expertise, understanding customer needs, and assessing market transformations, despite all the other hundreds of day-to-day tasks they also must complete. They can distinguish what efforts are beneficial and what are wasteful.

The same applies to the financial data you must understand to succeed: Distinguishing between useful expenditures and imprudent ones is something an entrepreneur must learn, and quickly.

Sadly, many business owners haven’t learned this; they fail to dig through their financial information and, as a result, allocate resources to the wrong places. But it doesn’t have to happen this way. Digging for the truth is less difficult than you’d think.

Even if you’re a solo operator providing one type of service, profit center analysis delivers pertinent information. You’ll uncover, for example, what kind of customer is the most valuable and whether traveling to customers outside your main area is sufficiently profitable. You may find your limited time is best spent on customers of certain sizes, in specific industries, or situated in particular locations.

Get comfortable with your numbers

Don’t hate to dig through your numbers; get comfortable with your financial statements by capturing useful information from them, meaning your data must be in a format that works for you.

Financial statements are not just for tax calculations (although your tax liability should never be a surprise, as taxes are payable at various dates throughout the year, and you’ll owe penalties if you don’t pay when they’re due). Financial statements should also reveal the hidden costs of poorly chosen expenditures. You’ll turbocharge your financial knowledge by adding profit center details to financial statements.

Figuring profit centers

Associating expenses with specific services or customers allows you to focus on the most profitable opportunities. For example, selling new products or services could be generating greater revenue but little additional profit. Likewise, finding more customers beyond your turf may seem enticing, but not if the travel costs erode your profit margin.

Run your business on facts, not intuition. Making false assumptions based on general revenue figures is a recipe for disaster; the formula for successful growth is closely watching the bottom line. You must know where your profits are coming from.

Instead of making these kinds of false assumptions that are not supported by facts, craft your financial statements by allocating expenses to profit centers. The results may surprise you. And, as a consequence, you’ll benefit by placing the correct emphasis on selling your most profitable services to the most profitable type of customer.

Getting help

A discussion with your accountant will help define profit centers for your organization. They could comprise different business offerings, key repeat customers, or regional markets. Professional assistance will also ensure that bookkeeping procedures are correctly designed to allocate revenue and expenses among the appropriate profit centers.

Even when all is going well for your business, profit center analysis gives you a forward momentum. Long-term success depends on never becoming complacent.

How to Understand Adjusting Journal Entries

The most important annual step any entrepreneur can take is to eliminate confusing bookkeeping and reduce future tax preparation cost. You can do this by recording adjusting journal entries.

Adjusting journal entries are additions or corrections made for tax purposes to your books; for instance, an adjusting journal entry records a non-cash expense, such as depreciation. And they are also used to re-categorize expenses or assets. An adjusting journal entry may have a powerful impact on your understanding of the cost of doing business. Small business bookkeeping often means taking shortcuts when it comes to how money is spent. One common mistake is treating loan payments as though they should apply entirely to the liability account. An adjusting journal entry will record the interest component of loan payments as an expense while allocating the principal portion to the liability.

Another example arises when money is borrowed to acquire a new asset such as business equipment. The full cost of the asset is recorded with a journal entry, despite the fact that it was paid for with loan proceeds rather than cash.

Journal entries almost always involve a balance sheet account. Therefore, it is essential that you be familiar with the transactions that appear on your balance sheet. When you don’t adjust your bookkeeping with your tax accountant’s journal entries, the balance sheet will continue to reflect inaccuracies. Next year, your accountant can’t reconcile your current balance sheet to a previous one; therefore, errors in your reported profit are never uncovered.