Why bother with bookkeeping? Most people would answer “because the government requires it.” While this is true should it is NOT be the real reason: the real reason is to manage your business to increase income and profits.
If you are using a computerized accounting system, such as the popular QuickBooks, Congratulations! QuickBooks or a similar software can save you time while providing a wealth of important information on your business. But their usefulness is limited by the information used to set it up. It is the old story of GIGO, when you put Garbage In, you’ll only get Garbage Out.
Step 1 in the setting up a useful accounting system is to have a sufficient number of income accounts. If all your sales go into one income account, you will have no idea what is generating your sales. Most smaller businesses can adequately break their sales initially into 5 to 10 categories.
Step 2 is to set-up Cost of Goods Sold (COGS) accounts that mirror the income accounts. If you sell and ship products, then you should have a Shipping Income account number and a Shipping COGS account number. For more on COGS, see my September 13, 2011 blog “Cost of Goods Sold vs. Operating Expenses.” Note: If you accept credit card and debit card payments, the processing fees are a COGS (not operating expense).
Having properly followed steps 1 & 2, you will be able to start to manage your business. Each month you will be able to create a Profit and Loss Statement that will show you the source of your sales. Likewise, you will know your related COGS and the COGS total as a percentage of sales. By subtracting your COGS percentage from Sales, you will know your Gross Profit Margin. These figures are followed by your Operating Expenses (generally fixed costs) and Net Profit.
To create meaning for these figures you now need to compare them to some bench mark. There are industrial standards, but often they are for much larger firms. It may be most meaningful to compare your figures to yourself. You can do this by comparing the figures to last year and/or a budget. In either case run the figures for the current month (e.g. April) you just completed and year to date (January through April).
QuickBooks and similar accounting software make these figures available at the click of your mouse. And, they let you drill down to find the details beneath the summary figures. Bookkeeping is important only to the extent it provides the numbers you need to manage your business for increased profits.