“I’ve started my own small business but have no idea how much money I’m making, cash just comes in and goes out.”
Does that sound like you? If so let us help break it down for you. The amount of money you make is called your Net Income.
Net Income = Sales – Cost of Goods Sold – Expenses
Sales – This number should be easy to track, it’s the total amount you have sold to customers. Be sure you are tracking returns also so that you know your Net Sales.
Cost of Goods Sold – Your cost of goods sold equals the wholesale cost of the goods you sold if you are a retailer and buy the goods at wholesale costs. The formula would actually look like this: COGS = Beginning Inventory + Purchases – Ending Inventory
Expenses – Tracking your business expenses is a crucial part of your business. You need to know your expenses for your tax returns and tax estimates. Figure out a system that works for you, such as filing receipts in folders once you have entered them in your bookkeeping software. Entering your expenses on a weekly basis will save you a lot of time and heartache at tax time.
Here’s a few types of expenses you should be tracking:
- Business Travel
- Meals & Entertainment (be sure to include on the receipt who you were dining with if you paid for their meal)
- Mileage (you can find many apps to track your mileage for business related travel)
- Shipping Costs
- Display Costs (If you are in the direct sales industry, you probably have a lot of these such as hangers, bins, decorations, etc)
- Gifts (Hostess rewards and giveaways if you are in the direct sales industry)
- Home Office Expenses – Discuss with your CPA, you may be able to deduct some home related expenses
Using a bookkeeping software will help you be able to see your Net Income at any time and know whether your business is profitable.