As an online business owner, you’re an expert in your niche, audience, and business. But what about your bookkeeping?
… probably not so much.
If you’re not sure when you last looked at your books, if you’re even on track with your financials, or what your numbers are telling you about your business, you’re not alone. So many people assume they’re “just not money people,” so they put their bookkeeping to the back burner.
But you can’t just ignore your books and hope for the best! You need to dig into your finances to know exactly how well your business is doing — and so you can plan for exciting things like hiring, large owner draws (yay, more money!), and more.
Of course, you might be thinking, “I’ll just hire a bookkeeper and they can handle it.” That’s true. Bookkeepers and accountants can help you manage the money in your business. But you still need to know enough to understand what they’re saying — and so you’re still in touch with your business in the event they shut down or you can no longer work with them.
It’s time to get educated about bookkeeping basics, so you “know enough to be dangerous,” aka so you can have a conversation about your money without having your eyes glaze over.
That’s why, today, I’ve got a complete overview of bookkeeping basics, including terms, concepts, and tips for finding the right professional when you need them.
Let’s start by covering the basics of money in your business. That means revenue, expenses, and profit.
Revenue is the money you earn through your business. That includes dollars from every income stream (like clients, products, services, and courses). It doesn’t include money you or your investors (or your Grandma) put into the business.
Not nearly as fun as revenue, but expenses are just as important. Every time you spend money on your business, that’s an expense. Buying office supplies, paying for software subscriptions, getting a new work computer, or hiring a contractor — all of those are expenses.
Now that you’ve got your revenue and expenses, you can calculate your business’s profit. It’s just the revenue minus the expenses. After you’ve paid all your business bills (don’t forget owner pay and taxes!), the money left over is your profit.
Make it easier to calculate profit by creating additional bank accounts: one for operating expenses, one for taxes, and more. Find out why these bank accounts are a smart move here.
Moving on to the next calculation, we’ve got profit margin. This number gives you a sense of how well your business is going. Take your profit and divide it by your revenue — that’s your profit margin.
Here’s an example:
A 40% profit margin is really good! Generally, a healthy profit margin is between 40% and 60%. But 30% can be fine too, especially if you’re paying your employees (and yourself) well and saving for taxes or time off.
Now let’s cover some key documents: P&L and cash summary.
Commonly known as a P&L, this report includes details about all the money your business has coming in and going out. In other words, your revenue, expenses, and profit!
If you want more detail than your P&L shows, you can generate a cash summary statement. This report still shows the money going in and out of your business but offers a little more detail.
For example, a cash summary statement shows you exactly where all that money is going — you can see how much of your revenue is going toward taxes, employee salaries, owner draws, office expenses, and anything else you spend money on. Some of those things won’t show up on a P&L Report because of the accounting rules about where things get categorized, but they’re still money coming out of your bank!
Together a cash summary and P&L show what’s really going on with the money in your business. These reports can also help you understand your company’s assets, liabilities, and equity, all three of which hang out on a Balance Sheet. (A Balance Sheet is important, but not necessarily something you need to spend a lot of time analyzing like you would a P&L.)
You can never have too much insight into your business’s finances!
Finally, let’s talk about the experts who can help you manage your business finances. Specifically bookkeepers (like me!) and accountants (like your local CPA).
A bookkeeper manages your business’s financial transactions. That means keeping track of income and expenses and helping you make sense of those numbers.
Your bookkeeper can explain what’s happening with your business’s finances, but don’t ask us to do your taxes! That’s what your accountant is for.
A Certified Public Accountant (CPA) is licensed to file your taxes. When tax season rolls around each year, you can take the reports from your bookkeeper and pass them over to your accountant. Some CPAs can also help you with tax strategy and wealth management.
Understanding basic bookkeeping terms is a critical part of running your online business. The good news is that the concepts aren’t nearly as complicated as the jargon makes them seem.
Basically, it’s all about understanding the difference between money out (expenses) and money in (revenue and profit). Reports like a P&L make those numbers crystal clear. And if you’re ever confused about your profit margin or taxes, you just have to reach out to your bookkeeper or accountant.
Want a top-level overview of how your business is doing financially?
I’ve got you! Download my free profitability workbook: How to Know If Your Business is Profitable!
This printable guide makes it easy to understand your company’s financial reports and stay on top of your finances. And if you need more support, I’m here to help!