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What’s more, when you connect Bench to your bank, payroll provider, and merchant processors, your financial data will update in real time. That means your financial statements can pull up-to-the-minute data every day of the month.
The great news is that your Bench financial statements contain everything you need to become one of these entrepreneurs. Once you know what to look for in your financials, you’ll be able to:
- See your business’s strengths and weaknesses
- Fix cash flow issues before they turn into serious problems
- Maximize revenue year over year
- Plot a course for financial success, by seeing what works and doing more of that
Oh, and you’ll also have an upper hand over any of your competitors who aren’t leveraging the data in their financial statements.
Ready to rise to the top of your niche? Make smart business decisions in real time using each of your Bench financial statements: the income statement and the balance sheet.
The income statement
Prepared monthly by your Bench bookkeeping team, your income statement shows:
- How much revenue your business generated over a period of time (revenue)
- The costs and expenses associated with generating that revenue (expenses)
- How much profit is left after expenses (net earnings or losses)
This information can help you find ways to increase profitability, create a budget, and stay in control of your money.
Here’s how to get the most out of your income statement.
See if your business is making (or losing) money
Ever heard the term “the bottom line”? It’s another name for your business’s “net profit” or “net losses” (depending on whether you made or lost money during the period).
This figure shows how much your business earned (or lost) over a period of time once expenses, operating costs, and taxes are taken out.
If you ever want to check if your business is making money, the bottom line of your income statement has the answer.
Eliminate “miscellaneous” expenses
Having a high number of “other” or “miscellaneous” expenses in your ledger is almost useless, since you can’t see where that money is going at a glance. Plus, it’s a red flag to investors.
Your bookkeeper will be vigilant about categorizing everything correctly. If a miscellaneous expense comes up, we flag it as “Awaiting Category” and work with you to categorize the expense.
With all of your expenses properly categorized, you’ll have a clear picture of your finances without a vague “Miscellaneous” group of expenses to worry about.
Stop burning cash on unnecessary expenses
Any reduction in spending is good for business. So make sure you check the “Operating Expenses” section of your income statement regularly to see where the majority of your money is going—and find ways to stop unnecessary spending.
Using the example income statement above, “Travel & Transportation” and “Office Supplies” were the highest business expense categories. Can spending in those categories be reduced? Halved? Eliminated entirely?
Reduce your “cost of goods sold” (COGS)
It’s important to know your “cost of goods sold.” This figure tells you the true cost of selling your products to customers.
For the fun of it, let’s say you owned an ecommerce store that sourced and sold fashionable accessories for French bulldogs. The total cost of goods sold isn’t just the money you paid to buy the accessories. It includes all of the other costs involved in selling your products to customers, such as:
- The money you paid to buy the accessories wholesale
- Shipping and postage costs for obtaining the accessories you’re going to resell
- Any other costs directly related to obtaining your goods for resale
Note that these costs are variable; they will fluctuate in accordance with your business’s level of sales.
Other costs that aren’t directly related to obtaining your goods, like office rent, office equipment, insurance, bookkeeping and accounting fees, bank costs, and advertising, are not included in calculating the cost of goods sold.
The sooner you know the expenses that make up your COGS, the sooner you can find ways to reduce them (and increase your profit margin on every fetching French bulldog accessory you sell while you’re at it).
Increase your gross profit margin
A declining gross profit margin is a tell-tale sign of future troubles for your business.
Because it’s possible for your gross profit to remain the same or even increase while your gross profit margin is on the decline, examining your gross profit margin is a much better indicator of the efficiency of your business.
Here’s how you calculate your gross profit margin as a percentage:
(Gross Profit / Total Revenues) x 100 = Gross Profit Margin
The benchmark for a “good” gross profit margin varies from industry to industry. Do some research to check what the acceptable standard is for businesses in your niche.
If it turns out that your gross profit margin is low or on the decline when compared to previous periods, look to see what costs you can reduce or cut altogether to improve it.
The balance sheet
Prepared monthly by your Bench bookkeeping team, your balance sheet includes:
- A breakdown of assets: what does your business have?
- A breakdown of liabilities: what does your business owe?
- Equity: how much is left over once all liabilities have been paid off?
Whereas the income statement shows profits and losses over a period of time, the balance sheet gives you a summary or “snapshot” of your business’s financial standing at a particular point in time (e.g. at year end). Note that this is a statement you’ll want to look at quarterly or, possibly, semi-annually—not weekly or monthly.
Here’s how to get the most out of the balance sheet.
See what your business owns (assets)
The balance sheet is an easy way to check up on what your business owns. From top to bottom, assets are listed in the Balance Sheet based on how quickly they can be converted into cash.
To qualify as an “asset,” an item generally needs to be sold or used by your business to make products or provide services that can be sold. Things like equipment, physical property, inventory, trademarks, patents, cash, and investments all qualify as business assets—and they’re all listed on your Balance Sheet.
“Current” assets like inventory are things that can be converted to cash within one year. “Non-current” assets are things that would take your business longer than a year to sell.
See what your business owes (liabilities)
You can also use the balance sheet to keep an eye on what your business owes now and in the future.
Liabilities can include:
- Money owed to the bank
- Outstanding credit card payments
- Taxes owed
- Rent for your office
- Money owed to suppliers
- Payroll you owe to employees
- Any goods or services you owe to customers at a later date
From top to bottom, liabilities are listed based on their due dates. They are categorized as “current” (liabilities the business expects to pay off within a year) or “long-term” (liabilities due more than one year away).
Having a firm understanding of what your business owes (and when those payments are due) will help you avoid overspending when money is tight.
See what’s left over (owner’s equity)
Owner’s equity, aka “capital” or “net worth,” is the money that would be left over if your business sold all of its assets and paid off its liabilities. This money belongs to the owners of the business—whether that’s you as the sole owner, or shareholders who have invested in your business.
If your balance sheet is showing a “negative owner’s equity,” it means that the owners (you) would theoretically owe money if all assets were sold and all debts were paid.
Watch out for excessive inventory
When you expand your product line, it’s normal that your total inventory (found in the assets column) will increase. However, if your total inventory goes up but you haven’t added any new products to your line, it usually indicates that your products aren’t selling as quickly as they should.
If a product sits on the shelf for too long, it’s at risk of spoiling or becoming obsolete. So use the balance sheet to run a quick check on your inventory from time to time.
Compare your current inventory total to the ending inventory total from the same period last year.
If your inventory is way up, but nothing new has been added to your line, look to see what isn’t selling and figure out how to get those products flying off the shelves again.
Calculate how much cash you have available for daily operations (working capital)
“Working capital” is the amount of cash your business has available for daily operations—things like paying the bills, buying inventory, paying employees, and taking care of any unforeseen expenses. If this number is negative, your business won’t be able to meet its current obligations without taking on a loan or outside investment.
Use this formula to figure it out:
Current Assets - Current Liabilities = Working Capital
Unpaid invoices and a slowing in sales are two common culprits for a reduction in working capital. Knowing your working capital can help you avoid overspending when you should be focusing on boosting sales and following up with clients who owe you money.
Avoid cash flow problems
The “accounts receivable” figure in your balance sheet represents how much money people owe you.
Usually it represents sales on credit that are yet to come through. But in some cases it indicates that customers aren’t paying you in a timely manner, which can lead to cash flow problems in the future (i.e. you won’t have enough money in the bank to cover your bills).
If your accounts receivable total is high, pinpoint which of your customers is responsible and speak to them about paying their overdue invoices or shortening their payment terms.
Top expenses report
Exclusive to Bench, you’ll find the top expenses report inside your Bench account.
This report displays your business’s top expenses month-to-month. It’s designed to help you stay in control of your spending and find ways to save. And since your expenses will update in real time—as long as your bank, vendor, and merchant accounts are connected to Bench—you’ll have the most up-to-date information at your fingertips.
Here’s how to get the most out of this report.
See where your money is going
Cash flow problems are one of the top reasons small businesses run into trouble. Keeping an eye on your (and your employee’s) spending will give you a firm understanding of what’s flowing in and out of your business at all times.
Glance at the top expenses report regularly to see if your expenses are in line with your expectations. If spending in a particular category seems high, do some digging and nip any problems in the bud before they turn into huge issues for your business.
Identify trends in your spending
Use the top expenses report to review your spending for the year. Make a note of any trends or spikes in your spending, and use this information to guide the way you budget and save throughout the year.
For example, if you sink a huge sum of cash into inventory just before the holiday season every year, open a separate business savings account and start squirreling money away in January. That way, you won’t be surprised when your holiday season bills come to deck the halls, so to speak.
Find ways to save
When money is tight, look at your top expenses. It might be easy for you to simply cut back on certain expenses. But for some recurring expenses, when continued spending is necessary to keep your business humming along, you could try to negotiate a better price with your vendors. So why not pick up the phone and give it a shot?
Most suppliers are open to offering a better rate to repeat customers. If that doesn’t work, you can always shop around for new suppliers who will give you the same (or similar) products at a better price.
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If you’re serious about growing your business, put down your sixth sense and pick up your Bench financial statements. Your business’s financial data will help you make informed, strategic decisions that maximize revenue and turbo charge your business’s growth.
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