This is the second article in a two-part series on bookkeeping. Be sure to read part I on Setting Up Your Financial Recordkeeping.
Keeping your books up to date and your accounting software running smoothly might feel like just another task on your long list of to-dos, but it can be key to supporting your small business growth. With accurate books and financial reports, you’ll be able to connect information from across your business and gain financial insights to help you make more informed decisions.
How to connect your sales and operations platforms for your bookkeeping
You’ll get a deeper understanding of the meaning of your financial reports if you link your information with data from your business’s point-of-sale (POS) platforms, inventory management platforms, and other operations tools.
All mainstream platforms offer “integrations” with the top accounting software, but it’s a good idea to do this with expert support – incorrect software integrations can result in hundreds or thousands of inaccurate transactions recorded in your books, making them useless and requiring hours to correct.
Instead, it’s a good idea to do a monthly review that puts together data from your profit and loss (P&L) statement and your sales and operations systems into spreadsheets or even onto paper to analyze:
- Units sold vs. cost of buying or producing: This will give you a real-time update on your per-product or per-service cost. With this, you can compare it to what you are earning for each transaction. This helps you identify the top-performing products and services from those that aren’t delivering meaningful results.
- Marketing spent vs. individual sales transactions: Measuring this ratio demonstrates how much sales growth you can drive through your marketing efforts. When you know which of your products or services responds quickly to marketing efforts, you can focus on the ones that drive growth faster.
Once you’ve built confidence and experience with using your accounting software, you can start to test out the software integration with your operations and sales platforms. It’s a good idea to start small and sync just your sales transactions. This lets you see all the individual sales – instead of the batch credit card deposits – so you have a clearer picture of how much you’re earning per transaction.
Pay close attention to how the sales software records transactions in your accounting software. Some systems record sales as direct deposits, while others are put into a holding account before being deposited. If you’re unsure how to handle transactions like these, consider asking a professional for assistance in setting things up.
How to perform a financial statement review from your bookkeeping
A financial statement review can help identify pain points and opportunities for your business by highlighting what may be holding you back and whether those challenges can be improved. It also provides valuable insights into how your business is performing compared to others in your industry and helps determine if your current take-home income from the business is sustainable.
There are two key ways for you to review and analyze your financial statements:
1. Vertical analysis
The most basic way to understand information from your financial reports is through a vertical analysis. This means calculating every revenue, direct cost, and expense on your P&L as a percent of total revenue.
With a vertical analysis, you can compare how your business is doing now versus how it performed in the past, and you can also compare your business to other businesses in your industry.
Here’s an example of what it looks like:
Let’s take a look at the marketing spend of $8,302, which is 5% of the business’s revenues. With this percentage, you can compare how much your business spent when it was earning $100,000 in revenue per year. You can also compare it to industry data easily found online for similar-sized businesses in your industry. This helps to answer questions like: Are you spending too much to make your products? Are you spending enough on marketing?
2. Cash flow analysis
With accurate financial reports, you can also have an in-depth look at your cash flow. There are costs, such as loan principal payments, the purchase of fixed assets, and owner equity distributions, that don’t appear on a P&L and, as a result, are not part of your profitability.
You should review these two reports every month to get a good sense of your cash flow:
- Balance sheet: The total equity listed on your monthly balance sheet provides insight into how much cash your business has – cash already claimed by debts and other payment responsibilities, and cash that comes from the profits you’ve earned.
- Cash flow statement: This report clearly demonstrates how much cash your business is generating or spending every month.
Once you’ve viewed these two reports, you can make an informed decision about how much to pay yourself and your business partners. This would be the profits the business earned, adjusted based on whether the business has positive equity and whether it has a sufficient cash reserve.
Pursuit can help
Now that you have a better understanding of your bookkeeping basics and how to use your bookkeeping to drive your business growth, take a look at the free resources available through Pursuit.
We’re a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware. We offer loans and a line of credit for working capital, commercial real estate, equipment, and more. You can use these funds to boost inventory and staffing, market your business, and cover just about any small business need.
Start your application to learn how we can best serve you!