How to Keep Track of Expenses and Profits. A How-To Guide.
Want to know how to keep track of expenses and profits in your small business? It starts by understanding and mastering your cash flow. There are a few strategies to keep top of mind when tracking your income and minding your expenses, so you keep from going in the red. Here’s our How-To guide.
Here’s What We’ll Cover
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
Why Does Cash Flow Matter?
Cash flow measures the total amount of money being transferred in and out of a business. Money coming in as a result of a business’s activities, such as client payments, government grants and bank loans, are considered to be ‘income’. Any money going out, such as building and equipment leases, payroll and travel, are classified as ‘expenses’.
Cash Flow matters to a company’s finances because it allows a business owner to know if the company’s income exceeds its expenses (in other words, if the company is profitable). If so, then the company is considered to have a ‘positive’ cash flow.
Sometimes when a company’s expenses exceeds its income, it’s not a surprise. This is a common situation for a lot of startups in their first couple of years of business as they need to establish themselves in the marketplace. But regardless of the type of cash flow situation a company has, it needs to set itself up for success by properly tracking profit and expenses right from the outset.
How to Track Profits
You’re in business to make profits, and one of the most important documents that allows you to do that is an invoice. But it’s surprising how many companies don’t put enough thought into what goes into them, or even to follow up later once payment is due.
Ever received a call from a vendor asking about an invoice from six months ago, or even a year? Imagine that same vendor has the same problem with a number of clients. That means money isn’t coming in as planned, and now that company will have a negative cash flow as a result.
A properly designed invoice with all the right information lessens the chance of it being delayed for processing, or getting lost in the shuffle.
Send Clear, Professional Invoices
Your invoice should not be left open to interpretation. It should be clear and include:
- Invoice Number
You generate this number, in case your client’s accounting department needs to find your invoice later.
- Description of Services or Products Provided
Be detailed. List exactly what was provided.
- Client’s Purchase Order Number
A P.O., or Purchase Order, is not necessarily required for every transaction, but when it is, it is generated by the client when he/she first requests your product or service. Referring to it here shows the client’s accounting department that your services were previously approved. This helps the payment process proceed without delay.
- Your Company’s Contact Information
This means full contact name, address, phone number, tax information (if applicable) and email address. Surprisingly, this important information is often incomplete, meaning a delayed payment.
- Total Cost and Payment terms
Net 30 days, net 60 or net 90? When exactly do you expect to get paid? Perhaps you have an agreement with the client on payment terms, but the client’s accounting department is unaware of it? Make sure it’s on the invoice, and that you also follow up once that due date rolls around, if payment has not yet been received.
Generate a “Profit and Loss” Report
A P&L, or Profit and Loss Report is an important statement that details how much your company earned in revenue and lost to expenses within a set period of time. A company typically generates a P&L report in intervals, perhaps monthly or quarterly – or even yearly, depending on its needs.
By generating a “Profit and Loss” Report, management can better plan its future spending. For instance, perhaps the P&L report indicates exceptionally high supplier costs for a key ingredient in your product, indicating it’s time for a new supplier. Or that your increasing rent is a sign to plan long term for a new place to operate out of. Consider a “Profit and Loss” report a tool that can help you determine how to save money.
How to Track Expenses
Tracking expenses may seem daunting at first, but knowing where to start can help you get organized and stay that way.
Open a Business Bank Account
Consider your needs. Today, you will be most likely paying most of your expenses digitally through your business bank account, so consider just how many transactions you are going to have in a given month. What will the bank charge you? Typically this will depend on the bank you go with but don’t get distracted by rewards or other incentives that are designed to get you to sign up. Consider them, sure, but decide if they are worth the extra costs involved or if you are sacrificing some other benefits.
Research a number of banks and compare their monthly charges, as well as any extra transaction charges that could put a dent in your profitability. And ask yourself, can this bank help you in the future with loans or extra credit if you need it?
Categorize Your Business Expenses
We all know expenses have a way of adding up, and although your business bank account is a good resource for determining your total spend, categorizing business expenses is also very helpful. This is because categorizing your expenses will later help you determine exactly where you are spending your money.
You can get as micro as you need, but business expense categories should include:
- Advertising Expenses
- Business Vehicle(s)
- Employee Benefits
- Meals & Entertainment Expenses
- Office Expenses
- Office Supplies
- Professional Services
- Rent, Utilities & Phone
- Travel Expenses
Budgeting for each category will also help because it will provide a guideline for you and your staff when it comes to spending money. Adjust accordingly as your company grows.
Track Your Expenses by Client
One thing to consider is that some clients can actually cost you more money than others. Let’s say you are in charge of a home cleaning business. Every month, your manager reports that the same three clients call to say they are dissatisfied with the job and won’t pay unless they get a significant discount next time. Or perhaps an out of state client requires too much face to face time, resulting in extra travel every time that client books a job.
Tracking your expenses by client helps you to see which clients cost more to do business with, and helps you to strategize for the future. Maybe it’s time to lose some clients, and concentrate on the ones who don’t need so much hand holding, or maybe just rethink your pricing structure.
Other Questions Related to How to Keep Track of Expenses and Profits:
What Is the Formula for Profit?
Profit is a financial gain. It is a dollar figure calculated by taking the total revenue and subtracting the total expenses. If the figure is positive it is considered to be ‘profit’. If the figure is negative, than that is considered to be a ‘loss’.
How Much Petty Cash Should I Keep on Hand for Expenses?
How much petty cash you keep on hand really depends on the size of your company and the amount of staff you have. If you’re a small business, without company credit cards, $300.00 is probably enough to carry you from month to month. You don’t want to keep large amounts of cash around, for the obvious safety reasons. However, make sure that the money is signed out, and that your company has clear policies on receipts.