What is a Profit and Loss Statement?

There are 3 main financial measures that provide you, the business owner, with the financial health of your company: 

  1. Profit and Loss
  2. Balance Sheet
  3. Cash Flow Statement

Income Statement 

Today we are going to take a deeper look at the Profit and Loss, otherwise known as the Income Statement. In a nutshell, the Profit and Loss shows you if your business is making money or not. The Profit and Loss shows you the summary of your revenue or income in relation to your expenses over a period of time.

Your income for your business is the money you are making from your clients. You are charging your clients for a product or a service that your business provides. Maybe you are providing ski lessons and charging your clients for your expertise. Maybe you are making delicious cookies and selling cookies to your clients. Either way, the money you are generating is your income or otherwise known as your revenue.

On the flip side, your business is spending money. You have to purchase your raw materials or pay for software. Maybe you are buying chocolate chips for cookies. Maybe you need software so that clients can book a lesson. You will have insurance for your business. You might have utilities or rent. Perhaps you are paying for labor. Whatever those expenses might be, it is important to know what you are spending, especially in relation to your revenue.

Net Profit

Your net profit is the difference between your income/revenue and your expenses. Your business is profitable…in other words, you are MAKING money if your income is more than your expenses. This is where you want to be. On the other hand, you are at a LOSS if your expenses are more than your income. You won’t know if you are in that position unless you are keeping an accurate set of books. 

As a business owner, you MUST know this about your business. You have to know if you are profitable or not in order to make decisions about your business. 

The Profit and Loss is a measure of your business over time. We can look at your Profit and Loss for a month at a time, a quarter at a time, or for a full year. Larger periods of time give you important big-picture information. Smaller periods of time might show you that in April your expenses are very high compared to your income. Maybe you have software subscriptions that get renewed in April. Or you might see that in October your revenue drops. No one is skiing in October. Can you figure out how to make some passive income in October or offer specials for the upcoming season? Those types of analytics help you make changes or adjustments in your business so that you can cover seasonality or patterns.

Now let’s talk a little more in-depth about the types of revenue and expenses.  

Categorize Revenue and Expenses

For a small business, the revenue is typically fairly easy to categorize. You might be an electrician so you are providing a service and selling parts. You can group all of your sales into one category and simply call it sales. Or you might want to break it into two categories: 

  • Services
  • Sales of Product

This would give you additional detail about how your business is making money. These should be big-picture categories.  

Expenses are a little more complicated because you need to categorize these based on tax rules in order to consider them deductions.

These categories can include items like: 

  • rent
  • insurance
  • subscriptions
  • utilities
  • payroll/labor
  • gas
  • raw material costs
  • cost of goods
  • etc.  

These must be carefully categorized to fully take advantage of your allowed deductions…a topic for another day but just remember, categorizing your expenses will save you in taxes.

Remember, regardless of how many categories you have, your total INCOME/REVENUE minus your total EXPENSES will determine your profitability.

Make Good Business Decisions

In a nutshell, are you making money? Is your business in the red or in the black? I like to tell my clients, while you might love what you’re doing if you’re not making money, then this is just a hobby. You better REALLY love your hobby if you’re willing to lose money! It is important that you know if you are making money or not. If you’re losing money, you might throw in the towel and read a good book…

If you are making money, how can you maximize your revenue? How can you minimize the time you spend working in the business by hiring appropriately? How can you determine when you should buy that new piece of equipment your business needs?  

Your profit and loss or income statement can help you steer your company into a path of success. Questions? Feel free to contact us!

Tips for Avoiding an Audit

No one wants to go through an audit. Just the word “audit” forms a pit in your stomach and causes you to cringe. Audits are time-consuming and costly.

Avoiding an audit should be a concern of any business owner. While there’s no way to guarantee you won’t be audited, there are steps you can take to avoid triggering an audit.

9 Things to Do to Avoid an Audit

1. First and foremost, PAY YOUR TAXES!

Make quarterly estimated tax payments and always be sure to pay your payroll taxes. File your annual taxes on time and make your tax payments.

2. Issue 1099s and W2s on time.

These are both required to be filed and remitted to employees/contractors no later than January 31. Filing these late is a red flag to the IRS.

3. Don’t mix business and personal.

Many small business owners try to deduct travel, vehicles, cell phones, etc that are not truly business. While some of these might be legitimate business deductions, be sure you understand the rules surrounding these “fuzzy” deductions.  

4. Pay officers/owners a reasonable salary.

Do not inflate salaries for officers or owners of small businesses. Inflated salaries will trigger the IRS to take a closer look. On the flip side, low salaries for business owners are also a red flag. The IRS requires that business owners pay themselves a “reasonable” salary for their work in the business. Your CPA should help you decide what “reasonable” looks like for your business. 

5. Be very careful of travel and meals.

Only true business travel and meals should be deducted.  This is a hot topic for the IRS. Excessiveness in this area will trigger an audit.

6. Only deduct your home office if you meet the criteria.

This is a particular topic that the IRS will focus on. Remember that your home office must be a dedicated space that is used exclusively for business. A dining room table does not qualify. 

7. Do not show a loss year after year. 

This becomes a yellow flag if you continue to show a loss for multiple years in a row.

8. Be very careful of treating labor as a contractor vs. an employee.

If you are paying people with 1099 wages as a contractor but they should be considered an employee, you are sending flags to the IRS and to your State tax agencies.

9. Keep a clear, accurate, and timely set of books.

Use bookkeeping software and ideally, a professional bookkeeping and financial services provider.

While there is NO guarantee that you will not be audited, following the above guidelines will help. Keep your business running smoothly by taking steps to avoid the disruption of an audit.

7 Financial Must-Dos for Small Businesses

If you own a business or are planning to start a small business, these are the essential practices to ensure that you are financially responsible. These steps will set your business up for success.

1.  Obtain an EIN number:

An EIN number is essentially a social security number for your business. By obtaining an EIN number, you are creating a level of separation between you personally and your business. You will need to provide your EIN number to others as you do business. This way, you are protecting your Social Security number and preventing identity theft.You can contact a professional to help you, or if you are comfortable, you can set this up by navigating the IRS website.

2. Open a bank account in the business name

Open a business bank account. Deposit all your income into this account and pay for all of your expenses from the business bank account. This will ensure that your bookkeeping is simple and accurate. It legitimizes your business. It captures your income and expenses for tracking profitability and preparing for taxes.

3. Form relationships with professionals

Every small business should have relationships with professionals who will help ensure the success of the business. These relationships include: lawyer, CPA, bookkeeper and insurance agent at the very least. You will likely also need an IT specialist and a banker. Forming these relationships and hiring the right professionals will foster the growth and success of your business.

4. Do your books

We cannot stress that you must have a bookkeeping system in place. You need to do your books yourself in a timely and accurate manner OR outsource your bookkeeping. This is the core measure of the financial stability of your business. It will help you make decisions about your company. Without an accurate set of books, you cannot file taxes, cannot obtain business financing, and you cannot make informed decisions about your business. We recommend that you use a professional.  You might want to do this yourself as a business owner and you might have the skills to do so.  As a business owner, you will wear many hats, you will be pulled in a lot of directions and books tend to be put to the bottom of your to do list.  Outsourcing them is a great option.

5. Pay your estimated taxes/payroll taxes

Stay on the good side of the IRS by paying your taxes. Keep yourself out of trouble with the IRS and prevent yourself from needing to come up with a lump sum when you file your taxes. It is difficult. We get it. Cash flow is an issue and paying taxes is the last thing anyone wants to do. But you won’t do yourself any favors by skipping these payments. You will need an accurate set of books to determine how much to pay on a quarterly basis.

6. Track your profit

You may have started your business because you have a hobby that you’ve turned into a business. But to stay in business, you must be profitable. Track your profitability by having a bookkeeping process in place and operating. 

7. Keep your receipts

You must keep your receipts. Many business owners believe that your bank/credit card statement is sufficient. It is not. If you are audited, the IRS will want to see actual receipts or electronic copies of receipts.  We recommend that you store receipts electronically.

Follow these practices to help ensure the financial health of your small business. Bookkeeping and Financial Service Providers such as Incline Business Essentials can help you with these steps. 

Why You Need Bookkeeping

If you run a business, the act of bookkeeping is essential. Let’s start by defining bookkeeping. What exactly is “Bookkeeping?”

Bookkeeping is the process of recording the financial transactions of your company. Bookkeeping categorizes the money coming into your business as income. Expenses refer to money that your business spends in order to operate. The act of bookkeeping organizes your expenses into categories that are used to file your taxes.

Now let’s talk about why this matters.  

File Your Taxes

As a business owner, you will likely hire a CPA to file your taxes. You will need to provide the CPA with your income and your expenses. Your taxes cannot be filed without this information. This leads to the next important reason for keeping an accurate set of books.  

Pay Fewer Taxes

This is probably the most attractive reason to have a bookkeeping system in place. Bookkeeping identifies all of your transactions so that nothing slips through the cracks. You must categorize each and every transaction that goes through your bank account. By keeping an accurate set of books, you will know exactly what you spend on gas or office supplies, or advertising. When you are gathering your data at the end of the year, you aren’t trying to remember how much you spent on that new computer or which client you took to lunch in May. Without a clear bookkeeping system, you will invariably miss out on deductions. You must have a plan and a process to ensure that deductions are captured.

Your expenses must be organized into categories approved by the IRS in order to be considered “deductions”. Without deductions, you will pay taxes on the entire income of your business. With deductions, you will rightfully cut this tax bill thereby saving you and your business money. For example, if your business brings in $100,000 without deductions, you might pay the IRS upwards of $25,000. But, if you can clearly show business expenses of $60,000, you might pay $10,000. This is a tax savings of $15K — not just nickels and dimes!

Track Your Profit

Profit is a key indicator of your business’s success. You can only determine your profitability if you are tracking your income and expenses.

Make Decisions About Your Business

Bookkeeping can help you make decisions about your business. Is it a good time to hire? Should you be increasing your prices? Are you spending too much on utilities? These decisions are guided by your business’s financial health.

Financing

In order to get financing for your business, you will need to provide the lender a set of books showing your income and expenses. Banks will require you to show your expenses vs. your revenue, otherwise known as your Income Statement or Profit and Loss. Bookkeeping will provide this report.

Catch Mistakes

Were you overcharged or charged twice for a service? Are you paying for a subscription that you are no longer using? You will catch these transactions through your bookkeeping because you are looking closely at every transaction.

Where Is Your Money Going?

Through bookkeeping, you will understand where your money is going.  This will help you budget and plan cash flow for the development of your business.

Bookkeeping will save you money by saving on taxes, cutting down on mistakes, guiding you through financial decisions, and improving your cash flow.  Business owners often want to do this on their own. Sometimes this works. But often the books are the piece of the business that well-intentioned owners plan to do and just don’t have enough time in the day.  

Bookkeeping is essential but it does take time, pulling you away from your actual business and preventing you from focusing on your clients.  As a business owner, you wear so many hats.  This is one that you can easily outsource with confidence. Reach out for a complementary consultation to see if our services would be a good fit for your business.

What Is Bookkeeping?

In the simplest terms, bookkeeping is the act of recording every single financial transaction related to a business. This is the bare bones necessity to having financial records prepared for tax filing purposes. Bookkeeping organizes your expenses into categories that are needed for tax filing. For example, all purchases related to office supplies are categorized so that a total spent on these items can be recorded as business deductions on the tax return.

In real business, bookkeeping is so much more than described above.  Bookkeeping services will vary depending on the nature of your business.  Here are some of the primary services that a bookkeeper might handle.

Primary Bookkeeping Services

  1. Track the bank accounts and credit card accounts to ensure that every transaction is captured accurately.  
  2. Track payables and might be responsible for ensuring that bills are paid
  3. Invoice your customers and track receivables
  4. Payroll
  5. Sales Tax
  6. Collecting W-9s from vendors
  7. Provide cash flow reporting
  8. Assist with budget creation
  9. Quarterly tax coordination with CPA
  10. Receipt Management
  11. Act as a liaison between you and your CPA

Bookkeeping is essential in the overall health of your business. Bookkeeping services ensure that you have the information needed to make decisions about your business. Your books are maintained properly to avoid mistakes and missed deadlines. Proper bookkeeping will help you understand your cash flow. Financial reports will be ready for your CPA.  

In summary, a bookkeeper will save you time and money while reducing stress on business owners. The success of your business depends on high quality bookkeeping.

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