Do your taxes pile up to impossible numbers? Are you not taking home the amount of money you should be?
Why is that?
There are a lot of things that contribute to this, for example:
Your Top line Number
Everyone has a top line number they want their firm to achieve. You’ll aim for that number, but that number on its own is irrelevant. You have all your expenses you need to take into consideration.
Revenue v.s. Profit
The difference between these two is that
Revenue = the amount of money you make before any expenses
Profit = the money you take home after all expenses are paid
So, the revenue number (like your top line number) is irrelevant. All it means is that you’re getting clients. If you’re expenses are twice the amount of your revenue, then that’s a problem.
What you need to be looking at is your profit/net income.
You need to run a P&L (profit & loss) report (also known as an income statement) in your bookkeeping software.
When you’re figuring out your profit, don’t forget the taxes you’ll have to pay. You’ll end paying 30-40% of your net income to taxes.
It’s human nature to check your bank account every morning to see how you’re doing, but don’t make the mistake of basing any decision off of that number. Whatever amount is there is not an accurate reflection of how your firm is doing. You may have written checks that weren’t cashed yet, you may have upcoming bills that weren’t paid yet, and then there are the taxes at the end of the year.
There are a couple of tools in your bookkeeping software that will help you determine how your firm is actually doing.
Accrual basis means it tries to match expenses to the revenue generated.
This would require entering all your bills into the system before they’re even due, this way they will be recognized.
The problem with this though, is that if you bill a client and he didn’t pay, it will show that as income even though you don’t have that money.
The cash flow statement is a good place to look. Just remember that it won’t take taxes into account, so you won’t be taking home the whole net income it generates.
Accounts receivable means you are still waiting for someone to pay you. Some people will be quick to pay while others will take their time.
Your accounts receivable can cause a gap that makes it difficult to pay your bills on time. If it takes too long to get the money you’re owed that will cause a negative cash flow.
When you first start you firm and it’s just you, you’ll probably have no problem taking on contingency cases because it’s just costing you time. But, as soon as you start hiring people or renting an office space, you’ll have expenses you’re obligated to pay. By taking on these cases at this stage you are risking two things:
If you want to grow your firm, you have to determine beforehand how much contingency you can handle. Otherwise you will run the risk of losing your firm.
Bookkeeping software v.s. Spreadsheet
Make sure you are using a bookkeeping software and not a spreadsheet. With a spreadsheet you can’t run a report in real time. It will make it very hard to figure out your net income and you’ll just end up guessing. It’s worth it to just get the bookkeeping software.
Stay tuned for the upcoming episodes/show-notes where we will delve deeper into these topics.
To Be Continued...