Make Financial Statements a Tool, Not a Burden

Sound business decisions are molded by knowledge of conditions in the same way that a downhill skier successfully traverses the mountain in an Olympic event. Sufficiently detailed information bestows insights that enhance wise decision-making, especially in challenging conditions. By contrast, imprecise information bends itself into false conclusions.

Unfortunately, business owners can make errors because they don’t derive enough information from their financial records. Poor judgments about where to allocate time or money correlate with the misunderstanding of past spending decisions. An efficient reporting process is the first step to having useful financial order rather than a blizzard of numbers.

Accounting Records Depth

The benefit of financial statements dissolves with haphazard details. For instance, recording costs associated with each product or service is a standard deserving of careful attention. In some industries, having the costs for each project is relevant. Leaving your bookkeeper in the dark about these specific elements results in less refined financial statements.

This technique of classifying costs enables calculation of profit margin for every line of business or a particular job. It further assures consistency that permits comparison of expenditures and profit across multiple periods. A service business should examine the profitability of each job and every client. Product-related enterprises must understand the profitability of various product lines as well as customers. These data permit informed decisions about raising prices and ceasing unprofitable business lines or relationships.

Consideration of the accounting method is vital. Accrual basis accounting is best for analysis because it matches revenue with corresponding expenses. Sales count as income when invoiced, and expenses are recognized as they are billed. Cash basis is commonly used for income tax purposes because revenue only counts when it’s collected and expenses are recognized only when paid.

Accounting software can produce either accrual basis or cash basis statements. Use accrual basis for evaluation, since it eliminates profitability discrepancies, which are triggered by timing differences between collecting revenue and paying associated expenditures. But you may use cash basis for income tax reporting.

Financial Statement Timeliness

Financial statements for periods that passed months ago are of little relevance. Superior decision-making requires recent information. Evaluation of results for the preceding month should occur soon after the month’s end. Bookkeeping services are often late in providing financial reports because they’re relying upon business management for key information. Delays in giving bookkeepers what they need will ultimately result in receiving stale financial data.

The responsibility for a company’s numbers rests with the owner. Bookkeepers cannot invent figures, but a business owner may provide estimates or guidelines for bookkeeper estimations that are corrected later. The aim is rendering of financial statements in time for prudent evaluation. Follow up with adjustments, but do not make perpetual changes to long-ago periods. And especially do not alter past-year bookkeeping after the income tax return is completed.

The only sure method for making effective business decisions is possessing accurate and timely financial statements with optimal formatting for easy analysis.

How to Mark Up Your Price Based on Gross Margin

A crucial factor in pragmatic business management is knowledge of gross margin. This term is commonly connected to markup, which compares the price your business receives from selling an item to the cost incurred to obtain the item. Not every business, of course, sells specific items. But all businesses have direct costs that are absolute necessities for delivering sales.

Gross profitability ignores general overhead costs. Those are the operating expenses a business incurs even if nothing is sold, such as rent and telephone service. Direct costs are the necessary expenditures to make a sale happen. These are things like materials and the labor cost for the specific time allocated to complete a sale.

Gross margin, however, is a bit different than gross profit. Margin is a percentage. If you mark up something 1.5 times above your cost, the price you charge is $150 if your costs are $100. Gross margin equals price minus cost divided by price. It’s your markup amount divided by the sales price. Notice that the gross margin in this example is 33.3% ($150 minus $100 divided by $150).

The objective is to maintain a consistent gross margin. How you accomplish this as costs change means adjusting your price. This requires identifying a markup that corresponds with the gross margin you want to maintain. Simply turn around the relationship formula to show that markup is 1 divided by 1 minus gross margin. So if you want to keep a 33.3% margin, you have to markup your costs 1.5 times, that is, 1 divided by 1 minus 0.333.