As an entrepreneur, most probably you can tell the amount of gross earnings your business generates in a month when someone asks you. However, can you tell that person how much is your net profit? Most likely, you can’t. Financial accounting is not easy to understand. It is challenging, and you have to put in a lot of effort into it. Nevertheless, as an entrepreneur, you need to do so. It is because there are a lot of advantages you can get if you have a clear understanding of even only a few accounting measures which indicates your current and future business health (Also see Advantages You Can Get from a Simple Financial Analysis).
Profit Margin
You can calculate the profit margin by taking your overall net profit after deducting taxes and other expenses, then divide the amount with your sales. It is a helpful method that can aid you in predicting the amount of profit you will generate in the future.
Note that the approximations are not always exact and accurate. However, they are quite near to the real value. The important idea here is that you may utilise this measure to make decisions in advancement, as well as to examine if your company can appropriately sustain its profit margins so that you get to know ways to improve if you need any (Also see Ways to Increase Your Business Revenue).
Gross Margin
The gross margin is defined as the sale price of a specific item subtract the amount it cost you to acquire an opportunity to sell it. For example, your company sells pencils at S$1 per piece. You purchase them from your distributor at half of that price, which is S$ 0.50, and you spent S$ 0.15 on every pencil for its packaging. In overall, you spent S$ 0.65 to sell the item. Thus you have S$ 0.35 as your gross margin.
As a reminder, that S$ 0.35 is not yet your net profit. Other things that you have to take into consideration include the costs your company spends on rental payment, wages, as well as utilities. You will know how many pencils you have to sell to cover those expenses by adding up all the expenditures.
You may start planning about ways you can increase your profit once you have calculated how many pencils you have to sell in a month. You can purchase more to lower your cost, do advertisements, expand your business, and so on.
Later, if you realise that it is impossible to hit the target of your sales you require to cover your costs, you can start considering if you can sell other items to balance the overall costs of your business (Also see How Can Business Owners Manage Their Time Wisely). You may also think about how much you need to raise the price of the things you sell or the ways you may reduce costs on various other expenditures so that you do not have to increase the prices.
Income Statement
An income statement is also called a profit and loss statement. The income statement shows your expenses, costs, as well as profits for a specified period. It is the ideal way to have a clear insight into your net income. The net income is something that investors and business creditors are searching for, as it demonstrates the amount of money your company has earned or loss throughout the fiscal period. Your net income is the determining factor of the amount of taxable income of your company.
Cash Flow Statement
This is almost the same as your income statement, just that it is more comprehensive. The cash flow statements display everything which is going in and out of your business, which includes non-cash deals. This enables you to see more clearly about how your business expenses its funds throughout a certain period.
A cash flow statement is extremely important as it can tell you how and where your company is generating income and what decisions you’ve made about the expenditures.
It is hard to involve yourself deeply in the accounting side of your business. Hence it would be best if you collaborated with companies that offer professional accounting services Singapore. By ensuring that your firm’s books are managed by the experts, you can have peace of mind. This is because not only the finances of your company are safe, but you are collaborating with a team that is willing to lead your way towards being a successful entrepreneur.