In other words… find out when your business is succeeding or missing the mark!
You’ve got your new business off to a good start. Now you’re wondering how to tell if what you’re doing is actually successful. The first thing you need to do is think about your money. Does the amount you’ve invested into your business generate income? ROI, business accounting and financial documents will indicate what your money is telling you about the success of your business.
What is ROI?
As an entrepreneur, you’re investing both time and money into your business. Setting a financial goal will help you more clearly identify the measure of your profit. Don’t just create a goal, also determine the way you will measure your progress as you move closer to that goal. One way to measure profit is by calculating your business’s ROI.
Return-on-investment or ROI is a great way to measure the success of your business. Calculating ROI can help you understand what’s working and not working in your business so you can make changes. It’s a way of asking, “What will I earn by investing this time and money into my business?”
Measuring ROI can be done by implementing accounting software (like Quickbooks) to help you track your business financial information and transactions. Do your research to guarantee that the program’s functionality will work well for your business structure. If you have the budget for it, consider hiring a Certified Public Accountant (CPA) to help you reach your business’ financial goals. Once you solidify your accounting, then you need to gather the necessary documents. Staying on top of your bookkeeping is key to a successful business — knowing how much money you have will be difficult if you aren’t tracking it.
LegalZing is available to help with all of your tracking and accounting needs! Not only can we help your startup become more successful, but we can help you calculate your ROI through our Virtual Bookkeeping service. Let us handle your accounting and bookkeeping for you so you can keep your focus on the tasks you enjoy doing most.
Your Small Business Accounting Structure
There are two main accounting structures that small businesses use: cash-based or accrual accounting. What is the difference? Timing. Cash-based accounting means you document and record revenue or expenses only when cash comes in or out of your small business. This means sales are only recognized when purchases or payments actually occur, whether to customers or vendors.
Accrual-based accounting is when you record inbound transactions at the time you invoice clients and outbound payments when vendors request payment from you. Instead of tracking physical cash flow when it occurs, an accrual system matches the income or expense when the product or service was provided to the customer. Even if no cash has been received from the customer (or an expense has been invoiced but not paid to the vendor), the revenue is documented.
If you’re starting to gather that owning and operating your own business entails a lot of paperwork, then you’re correct. Being the one in charge means you need to be very organized and rigid regarding reports, filings and accounting practices.
When it comes to the reports and filings that must be completed, the ones that measure the success of your small business should rank near the top of the priority list. Have documents available that show how successful your business is, that your business is earning a profit, that it is ready to scale, etc. This is useful information to have on hand in case you need to report back to shareholders and investors.
Be at the ready with the following financial documents that will measure your business’s success.
Accounts receivable aging
This document provides a time frame from when an invoice was sent to when it was collected. Accounts receivable aging keeps track of which customers frequently pay late, when they started paying late and how much money they owe.
Balance sheets tell you how much money your business has and how much it owes. Assets are resources that produce positive economic value like bank accounts, property, computers, etc. Consider liabilities as future sacrifices of economic benefits like credit cards or business loans. Liabilities add to your debt, but provide you with the resources to invest. Adding up your assets and your liabilities will give you the value of your business or total business equity.
Cash flow statement
This document is usually made up of three sections. Operating activities summarizes the amount of money flowing in and out. Investing activity is the buying and selling of business assets. Financing activity is how much cash is flowing in and out of your business due to debt or equity activity.
Profit and loss statement
A profit and loss statement is also known as an income statement. This is the most important financial document for a small business. Income statements tell you where your business revenue comes from, what are the most profitable parts of your business, and what you spend your business’s money on.
Pro Tip: If this all sounds like gibberish, don’t be afraid to ask for help. Sometimes asking for help is the best thing you can do for the success of your business.
Are numbers, spreadsheets and organized filing systems not your strong suit? Don’t worry. LegalZing has a team of highly trained professionals that can help you with all of the above information and more. We know it can be hard and complicated to run a business, but we’re here to take the headache out of it and help your business grow and succeed. Head to our Get Started page and get started! LegalZing will set up a free Discovery call with you to find out how we can best help.