What is your business’s bottom line? When someone is first starting out with a business, they are often not very comfortable with the financial management aspect.
Often, small business owners think that amount of money in their business bank accounts is the best way to figure out how a company is doing from month to month.
But in reality, there is a great deal more to address when it comes to determining and managing your business’s bottom line.
Understanding the Basics
The amount of money in a business bank account results from cash credits and debits that your company incurred during a period of time. The debits are things such as withdrawals, direct debits and checks that you use to pay for things that your company is going to need.
The credits are the amounts of money that is deposited into your bank account. When a customer pays for items that he or she bought from you, the money is paid into an account.
If the business bank account that you have for your business gives you interest, the amount of money that the interest incurs will show up as a credit. Due to the fact that it shows everything, your bank account isn’t going to be a good representation of how your sales are doing.
Something else to keep in consideration is something known as accounts receivable.
Because a lot of businesses allow customers to pay for something up to a certain time after they purchased the item, it means that the company has money coming in – but it hasn’t arrived yet.
A/R, Profit and Loss
A business bank account doesn’t know that there is money coming in – it knows that there is cash that has been placed into an account. Because a bank account doesn’t register that there is money that is coming in, how can it be a good indication of the sales that a company makes?
A big part of a company’s sales can be accounts receivable, so not factoring them into the equation can make a small business owner think that he or she is doing worse than they are in reality.
Instead of using your business bank account balance to figure out your small business bottom line, take a look at the statement that shows your profit and loss. It will show something known as gross profit.
This shows the amount of revenue that has been generated reduced by any production costs.
Although it’s easy to look towards your business bank account when you are looking for an idea of how your business is doing, it’s also easy to see why it’s not a good indicator. Be sure to keep everything in mind when you are figuring your business bottom line and use your statement as a guide to see how the business is doing.
A business bank account is a good place to start, but it’s not all-encompassing. To really know what your small business bottom line is, you have to look at the big picture and consider all of the factors.