That’s right, friends! It’s back to basics time. Believe it or not, most people don’t go into business for themselves so they can manage all the nitty gritty financial details (surprising, I know). That’s why I’m here, to provide insights, tips, and resources while you learn how to manage your business’s finances. The best place to start is tracking your cash flow. 

What Are Business Profits and Expenses? 

Let’s start with some simple definitions. 

Business expenses are the costs of running your business. This can include insurance, marketing, bank fees, maintenance & repairs, depreciation, utilities, office expenses, employee benefit programs, and more. It all depends on what you offer. 

Profit is the money you have left over after you’ve paid for expenses. There are three types of profit: 

  1. Gross profit is product-specific, based on the selling price minus any production costs. 
  2. Operating profit is the profit of a business before any deductions of taxes and interest. 
  3. Net profit: This is your actual profit after working expenses that weren’t included in the gross profit calculations are paid. 

 

Why You Need to Track Your Cashflow 

Cashflow is defined as the flow of cash in and out of your business. Cash inflow includes money coming in from business activities, sales, grants, and loans, while expenses are the money flowing out. 

Cash is king as they say which is why cashflow is so important to track because it tells you if you’re making more money than you’re spending as a business—if your business is profitable. Tracking the movement of business finances is so important to help you make informed decisions as an owner about the growth of your business. 

 

How to Track Expenses

Let’s go back to the beginning for this one. 

Step one: Categorize your expenses. I’m talking Rent, Utilities, Supplies, Payroll, etc. This will help you manage where your money is going and make informed decisions about cutbacks or alterations for each expense. 

Step two: Open business bank accounts. You always want to keep business and personal finances separate! Per the Profit First method, these can reflect your business expenses: Rent, Utilities, Payroll, Supplies (pretty much reflecting your expense categories), plus an account for Profit. This way, whenever you make a sale, you can divide it among your expense accounts and put the remainder in your Profit account. 

Step three: Open a business credit card. Again: Keep personal and business separate! You can charge business expenses to this card, giving you the benefits of both tracking expenses and earning rewards! 

You may also utilize accounting software or expense tracker apps. Accounting software, including QuickBooks, Sage, Xero, and FreshBooks, automates processes for you, recording transactions and account balances. Expense tracker apps are for the more digitally inclined, and connect to your business accounts and track everything automatically. 

 

How to Track Profits

Well-tracked profits come from a collection of methodical actions and tools: 

  • Develop a system that works for you. Whether you go digital with accounting software or spreadsheets or keep it all on physical paper, make sure your system is what works best for you. 
  • Invoices: Your best friend. A comprehensive invoice can save you a lot of time and trouble when you’re waiting on payments (that may or may not be late). If your invoices are well-designed, you’re more likely to be paid on time. 
    • Your invoices should include the date, an invoice number (generated by you for accounting purposes), a description of the product/service provided, the client’s purchase order number (again, for accounting purposes), your business’s contact info, and the total cost and payment terms. 
  • Create a Profit and Loss Report (P&L). This document tracks how much revenue your company earned and how much was spent on expenses within a certain amount of time. Most businesses create P&Ls regularly, whether it be monthly, quarterly, or yearly. This just helps you plan for future spending. For example, maybe you notice that you’re spending waaay too much on delivery. It may be time to find another delivery service or charge more for the delivery option. A P&L is designed to help you make decisions like this. 

 

I hope you’re feeling more prepared to take on your business finances now! If you have any questions or need assistance untangling your business’s financial situation, I’m here to help! You can always reach me through my site!