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9 Questions To Build Profitability Into Your Accounting

9 Questions To Build Profitability Into Your Accounting

Do you want to build profitability into your business accounting? Let’s start with one question. Do you follow generally accepted accounting principles? GAAP tells the story of your business this way: Sales minus expenses equals profit.

However, Mike Michalowicz’s book Profit First argues that we have been following the wrong formula for profit and that we need to flip it. According to Michalowicz, it should look like this: Sales minus profit equals expenses.

Being a certified Profit First advisor and the owner of a company that provides bookkeeping services, I help businesses switch accounting principles around and set themselves up for permanent profitability. To me, “profitability” is not a dirty word. Rather, the purpose of every small business out there is to make a profit. Small-business owners can ask themselves these questions to help set up their accounting systems for permanent profitability.

Can you reverse-engineer how much you need to sell to support your lifestyle?

Profit First calls this “lifestyle congruence.” You must know how much you need to sell, based on your profitability, to calculate how much the business can afford to pay you, how much it can afford to pay staff and to produce your product or service. You might recognize in the process of reverse-engineering that some things need to change to improve profitability.

Do your financials tell the story of your business?

There are generally only two ways to increase profit: increase revenue or decrease costs. While it might sound simple to do, it’s not. You should be able to identify ratios and percentages such as overall gross profit and gross profit by revenue stream. The devil is in the details, and you need clean financials you can understand. Understanding your financials can help you figure out what percentage of your revenue goes toward paying your materials and contractors expenses and how much is left for profit, owners’ pay, taxes and operational expenses.

Can you easily identify how much you are paying yourself?

You’re the most important stakeholder of your company. Don’t you deserve to know how much you are earning? If you’re struggling to understand the complexity of your financials to the point that you don’t know how much you are earning, it’s time to get a better handle on how transactions are being categorized.

Are you measuring the results of leveraged spending?

Whether you’re measuring the return on investment of a marketing campaign, setting up quotas for sales commissions or tracking employee output, you need a plan for the money your business is spending. For example, during the pandemic, many of my clients received funding through the economic injury disaster loan and employee retention credit programs. We created a plan for leveraged spending that would use that cash in a measurable way and result in a predictable outcome and a return on investment.

Is everything accounted for, clearly and without confusion?

If you don’t keep track of your assets and liabilities properly, they become a jumbled mess. To avoid this, ensure you’re working with a reputable bookkeeper who can quickly pinpoint and sort out issues and support you in keeping your books clean and organized. Good numbers are necessary for decision-making, as well as to accurately state your income and pay only what you truly owe when tax season comes. Plus, in the event of an audit, organized books can help make the process less expensive and stressful.

Does every dollar have a purpose and place in the business?

Setting goals and measuring against them is fundamental to improving profitability. You must be able to identify if you have over or underspent. Ensure you can state your business’s financial goals, set up a plan to achieve them and measure progress along the way.

This means ensuring you’ve set up the right target allocations and repeatable allocation transfers, something also discussed in Profit First. Some businesses might choose to organize finances into multiple bank accounts and allocate the money in each account for a specific business purpose. Moving money based on preset target percentages from the income account to the other accounts on a systematic basis can help a business maintain financial discipline and ensure that essential expenses are covered.

Is your tech stack adapted to sync properly with your accounting?

We recently worked with a business using industry-leading software to manage estimates, leads and payments. It was supposed to easily sync up with their accounting system, but it did not. Our client ended up with some duplicate income, which we discovered was due to date format mismatches.

Technical proficiency matters. Be sure your bookkeeper knows how to set up your software to sync with your accounting software for accurate numbers. If they don’t set up the software properly, it usually creates more mystery around where your money goes and negates the technology’s ability to improve processes.

Are your financial reports timely?

If you’re waiting months for financial reports from prior periods, you’re getting outdated information that won’t help you make decisions. Ensure you review your financial statements consistently and know that the numbers are accurate. Good data today means better decisions tomorrow.

Do you trust your numbers, accounting processes and the communication happening between you and your accounting team?

Many small-business owners need accounting advice more frequently than once a year when taxes are due. Ensure you’ve shared your goals and what success looks like to you with your bookkeeper. Armed with this information, they can warn you when you’re off track and proactively recognize things deteriorating before it results in a cash crunch.

If you’re looking for a bookkeeper, keep in mind that they should not only possess technical skills but also consultative and communication skills. They should align with your company’s values and goals as well.

To beat the odds of business failure, identify ways to manage your financials with an accounting system that contributes to the success of the organization. Ensure you and your bookkeeper have a close eye on spending, access to regular reviews and adjustments, and a focus on profit. If you have questions or are looking for the right bookkeeper to get your biz on track, reach out! We’d love to help.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Angie Noll
angien@reconciledsolutions.net