As you’ve probably guessed, business owners should be tracking their finances- but what does that really mean?! One of the most asked questions I get is what business owners should be tracking and what to do with the information you’re tracking.
We track for two reasons: taxes and information. Tracking for taxes is the technical side of things and the part of tracking that helps you stay legally compliant with the IRS.
Tracking for information is the analysis side of things. It’s how you integrate the information you track into your decision making. Your business has its own language, which is money. By understanding your numbers, you’ll be able to ask your business questions and have it respond back to you.
Are you ready to learn your business’ money language?
What we’re talking about
- Tracking Your Income
- Tracking Your Expenses
- Tracking your Net Income (aka Profit)
- The Role Your Taxes Play In Your Business
- Cash Flow – Tracking It & Understanding It
Tracking Your Income
You need to track your income in your business for tax purposes. You’ll report your gross income on your taxes. Gross income is all the business revenue you earn before you account for expenses and costs.
But, you can take this tracking one step further by breaking it down into specific categories. This is where the language of your business comes into play.
If you have multiple income streams, you should distinguish between them to see where you are earning the most and the least money. This will allow you to see how you make your money, and understand why you have revenue changes in your business.
It’s helpful to think of your revenue streams as people or personalities. They each have their own strengths and weaknesses, as well as individual needs. Through tracking, you can understand the qualities of each income stream and predict what will make them “happy” and “sad.”
This allows you to see where there is potential for growth and when a service or product might not be the best fit for your business model.
Tracking Your Expenses
Like income, you track your business expenses for tax purposes and the IRS does require some level of breakdown to various tax deduction categories.
But, you can take your tracking one step further by also creating expense categories that answer key questions you have about your business. When deciding what expense categories to track, work backwards from the challenges you’re facing in your business. Then, identify what information you need to address these challenges. That’s what you’ll track.
It’s also helpful to understand how much you spend on essential expenses every month. In other words, what’s the bare minimum cost to run your business? Knowing this will help you set financial goals and know what income numbers you need to hit every month.
Tracking your Net Income (aka Profit)
Next, you’ll want to track how much money your business is making, also known as profit or net income. Your gross income minus your cost of goods sold and expenses is your net income.
If it’s positive, then you’ve made more than you’ve spent and you have profit. If it’s negative, then you’ve spent more than you’re making. Understanding your profit will help you gauge if you’re moving towards a sustainable business model.
You will need to ask yourself if the profit you;re making is enough and what you’re going to do with your profit. Will you pay yourself? Can you pay yourself? Are you saving for taxes? Can you pay off your debts? Will you use the profit for future investments or an emergency fund? You will have a unique vision of what you will do with your profit.
The Role Your Taxes Play In Your Business
Taxes can have a significant impact on the health of your business if you aren’t saving for them. You need to track how much you should be saving for taxes and whether or not you’re on track. Keep track on an ongoing basis and ideally save every month.
Cash Flow – Tracking It & Understanding It
It’s important to know how much cash you have on hand and how much you’ll need for upcoming bills. This is what we call cashflow tracking.
Keep in mind that cash flow isn’t just business expenses. It’s all the money that goes out of your business, including covering expenses, paying yourself, your tax savings and any kind of loans or debt payments you have.
Knowing and understanding your cash flow is proactive because you are looking towards the future and planning it out. If you don’t have enough actual cash, then you’ll need to create a plan for how you’ll manage the outflow.
Will you use a credit card? Savings? Is there a cash flow issue now and will it continue in the future? How can you set yourself up to not have cash flow issues in the future?
It’s important to not only know your numbers in your business, but to also understand them.
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