Small business bookkeeping is one of the foundation blocks of a successful business during a period of time. It is also one of the most neglected parts of many small businesses.
Many small business owners do not bother with any bookkeeping until it comes tax time when the IRS has expected them to adhere to accounting standards.
Some will go to the trouble of hiring a bookkeeper or accountant…
but then they don’t give the monthly reports a second glance.
Both are huge mistakes!
Sharon Osborn from The Talk can testify to that. She and Ozzie ended up paying almost two million dollars to the IRS in back taxes. She stated it was because she didn’t pay attention to the financial side of their business. She tweeted this message soon after she discovered what she owed: “You can’t rely on anyone but yourself. You have to be on top of your own business affairs. My fault. Lesson learned.”
So whether you do your own small business bookkeeping or hire your bookkeeping out…you must be on top of your own business affairs, as Sharon so eloquently put it.
Small Business Bookkeeping: Internal Income Statement
Preparing and reviewing a simple internal income statement can be an effective way of making sound business decisions and staying on top of your business.
Analyzing your data and calculations in an internal report such as the sample income statement above can help you discover what is working and what is not, where you need to cut expenses or where you might need to increase them, and how your income/expenses are in comparison to another reporting period.
Here are some small business bookkeeping tips for preparing internal reports that are easy to understand and the most effective in making sound business decisions.
Tip 1: Title your income statement whatever works best for you. I have seen internal income statements titled several different ways. Here are a few of the most common:
- Statement of Revenues and Expenses
- Statement of Operations and Operating Expenses
- Operating Statement
- Statement of Financial Performance
- Earnings Statement
- Profit and Loss Statement
I would also add a dash and on what basis it was prepared, such as Statement of Revenues and Expenses – Income Tax Basis (see sample income statement above) or Statement of Operations – Tax Basis (Unaudited).
You could also add a footnote on the bottom saying Notice to Reader “Statement prepared on an income tax basis, not GAAP.
Note: It depends on your individual business, but if your financial statements are mainly for internal use and not widely distributed than no … you are not required to follow strict GAAP (Generally Accepted Accounting Principles) guidelines.
You could prepare your financial statements on an income tax basis instead of GAAP. GAAP was developed mainly for public companies that had to report to third parties such as investors.
In income tax basis accounting, the financial statements are prepared using financial information as it will appear on your income tax return.
If you are preparing it for a third party, such as your banker, you will need to check with them and find out what the requirements are for your financial statements. P.S. If you are required to provide financial statements to conform to GAAP, I would consult a CPA before preparing them.
For those of you using the accounting spreadsheets from this site, You will simply type in the new title on January’s report, and the rest of the reports will update with the new title.
For those of you using QuickBooks: Go to reports → Company & Financial, → Profit & Loss Standard. Click Modify Report button, then click the Header/Footer tab. Edit Report Title then clicks ok.
Tip 2: Rearrange your expenses. Arranging your expenses listing your biggest expense first. You will be able to tell a glance what your highest expenses are and monitor them.
In most accounting software, the expenses will be listed alphabetically. In most software … to change the order of your expenses, you will need to rearrange them in your chart of accounts first.
In QuickBooks, go to Lists, then Chart of Accounts (or press shortcut keys Ctrl + A). Click on the little diamond that is in that yellow bar at the top, then go down to your expenses and click and hold that little diamond to the left of the account you are moving till it changes to a four-headed arrow. Then simply drag it where you want it to move that account. P.S. You can do your income accounts the same way.
In your small business bookkeeping spreadsheets, you simply list them in the order you want them in.
More Small Business Bookkeeping Tips
Tip 3: Set up a column to compare your expenses in relation to your income. I do this so I can see at a glance what expenses are the biggest percentages of my income. I will closely monitor those profit-eating costs to see if:
- I can reduce them in any way without reducing my income
- They are going up or down in relation to my income.
In QuickBooks, it is really easy to add this column, simply pull up your Profit and Loss Standard Report and click on the Modify Report button in the left-hand corner. Go down to “Add subcolumns for” and put a checkmark in % of income. See the sample income statement above.
In the small business bookkeeping spreadsheets offered free on this site, to the right of your last column, build a column titled % of Income.
- Highlight column and right-click. Go to format cells. Under Category, choose Percentage. Change Decimal Places to zero.
- Across from the expense account in a new column, type in the equal sign, click on the amount in the expense account, then type in division sign (forward slash), click on the amount in Total Revenue or individual income account (your choice) … then hit Enter.
- Do the same for all accounts.
The important thing is to prepare a monthly and/or quarterly profit and loss statement and then sit down and study it. See what you can change, improve, or reduce to grow your business.
Tip 4: Format it to compare a current reporting period to a prior reporting period. This is imperative! Take time to set up and study a comparative income statement (absorption costing income statement or variable costing income statement).
You can compare this month to last month or, better yet, the same month a year ago. Compare this quarter to the previous quarter or to the same quarter a year ago.
Last of all, always compare this year’s income statement to previous years.
Did your income increase or decrease? By what percentage? Did your expenses increase? In proportion to your income?
In QuickBooks, this is an easy report to create. Simply >: Go to reports → Company & Financial, → Profit & Loss Per Year Comparison.
These diagnostic reports can help you identify good and/or harmful trends. Are your expenses steadily creeping up, but your income is staying the same or, even worse … declining?
If so, it is time to jump in and figure out what you can do to reverse this harmful trend.
Studying the data in internal reports or financial reports such as annual reports that include the income statement, balance sheet, and statement of cash flows or cash flow statement will help you, lenders, and potential investors make wise and financially sound decisions for your business. Financial statement analysis includes special consideration to current assets, total assets, current liabilities, total liabilities, inventory, working capital, cost of goods, shareholders, creditors, operating profit, profit margins, net sales, net income, and equity. Some of these items will be calculated using financial ratios such as ratio analysis, receivables turnover, and quick ratio. All of these components and line items are essential to the success of a business and can be determined from the statement of financial position.