Getting Your Small Business Accounting in Shape: Revenue

Accounting was not a top priority when you started your business. It's common to prioritize your client's needs while neglecting your own financial management. Ignoring bookkeeping can lead to not knowing which invoices are paid or which services are most profitable. Understanding the basics of small business accounting, especially revenue management, might seem daunting, but it’s crucial for sustainable success.

While revenue may seem straightforward, it has various layers that you might have yet to consider. In this article, we'll guide you through understanding different revenue sources and streams and explain the relationship between gross revenue and gross profit, setting you up for financial clarity. Let's get those books in order!

What are Your Potential Revenue Streams?

First, focusing on the areas that will most effectively help you achieve your revenue goals is important. Understanding your revenue streams provides insight into your client base and facilitates better ways to serve them. Additionally, diversifying your offerings can enhance income stability.  Here are the key revenue streams to consider:

• Product Sales: Revenue from selling physical items like spare parts or equipment.
• Service Revenue: Earning from labor charges for repairs, installations, and maintenance.
• One-time Transactions: These might be less predictable but can involve significant amounts, such as emergency repairs. They require careful planning to avoid unnecessary inventory expenditures.
• Recurring Transactions: Examples include monthly service contracts for commercial clients, offering consistent cash flow that aids in managing daily operations effectively.

By understanding and optimizing these revenue streams, you can better strategize for your business’s financial health.

What Are Your Revenue Sources?

Understanding revenue sources is crucial for accurately managing and forecasting cash flow. It involves analyzing your customers' various payment methods and associated costs.

• Credit Card Payments: Widely favored for their convenience and rewards, credit card payments are managed by a processor that links the credit card issuer to your business bank account. Fees typically range from 1.5% to 3.5% of the transaction value.
• Automated Clearing House (ACH) Transfers: These direct-to-bank transfers incur lower fees averaging between 26 and 50 cents per transaction due to fewer intermediaries involved.
• Wire Transfers: Fast and suitable for large transactions, wire transfers incur higher fees ranging from $15 to $30 per transfer.
• Checks: Despite the rise of digital payments, checks remain in use. They usually involve no processing fees but require manual handling for deposits.

By understanding your clients' payment preferences and the fees associated with each method, you can better manage cash flow and explore cost-effective payment solutions. Evaluating these fees against your revenue can inform strategies to minimize costs or explore alternative payment options.

How Can You Capture and Record Your Revenue Efficiently?

Once you’ve gained a clearer understanding of your revenue, it’s crucial to establish an effective system for acquiring and recording it. Remember, revenue isn’t recognized until it’s transferred to your bank account and accurately logged in your books.

Consider these tips to enhance your revenue management:

‍

• Assess your current financial situation. There are several components to evaluate your financial health:

‍

• Consistently reviewing your bank statements ensures they are free of discrepancies, missing information, or suspicious transactions.
• Ensure invoices are created, sent, recorded, and tracked, including ensuring all completed jobs have a corresponding invoice.
• Regularly review and update your profit and loss (P&L) statements. If you have an accountant, ensure they provide updated and accurate P&L statements, which can help identify significant expenses and areas that generate the most profit.

‍

• Identify and address issues. Are you constantly struggling with missing invoices, incorrect billing, or delayed payments? Maybe it’s a payment method or invoicing issue. Determining the root cause can help streamline your processes.

‍

• Compile, review, and reconcile records. Make it a habit to regularly organize and cross-check your transactions to ensure you correctly categorize your revenue and expenses. This also ensures you don’t overlook payments and bills.

‍

• Upgrade your accounting system. Based on your findings, reevaluate your current bookkeeping and financial management system. This might include investing in new software, training staff, or hiring accounting experts.

What is Your Gross Profit?

As a small business owner, you likely already know that gross revenue, all the sales your business brings in, has to be adjusted for the cost of generating that revenue. After subtracting the cost of goods sold (COGS) from your total revenue, gross profit remains. It's a crucial metric that reflects the core profitability of your business before accounting for overhead costs.

‍

While revenue is important, smart businesses focus on gross profitability because it is the true measure of whether your business generates sales or makes money after covering the direct costs of providing your products or services.

‍

Calculating Gross Profit:

• Gross Revenue: This includes all sales your business generates.
• Minus COGS: These are the direct costs of producing your goods or delivering services. They include:some text
  • Direct Materials: all the raw materials used to make a product, including the shipping costs to acquire them.
  • Direct Labor: wages, salaries, and workers' benefits in production, service, and delivery.
  • Shipping and Transportation: costs of getting the product to the customer or your crew to the customer’s house for service.
  • Duties and Taxes: fees and taxes required to import and export goods.
  • Returns and Warranties costs for accepting or enabling product returns and warranties/guarantees for products and services (like parts replacements).
  • Commissions: a percentage of the sales that goes to agents and other intermediaries.
  • Utilities and Overhead: all other production costs, including materials and labor, such as electricity, water, gas, and equipment maintenance.
  • Research and Development: costs associated with developing a new product or service, such as market research.

Properly tracking and accounting for these costs is vital for calculating a viable profit margin. Effective job costing is essential here, mainly when serving large clients with high upfront costs, such as bulk material purchases for office renovations. Maintaining attention to costs in daily transactions is equally essential. Finding balance ensures sustainable financial health across all business operations.

Consulting With a Small Business Accounting Professional

As your client base grows, you may reach a point where managing your bookkeeping becomes overwhelming. While this signals business growth, it might be time to seek more specialized support.

Bringing in a skilled bookkeeping service provider can streamline this process. To ensure a smooth transition, vet potential providers carefully. Prioritize those with experience working with small businesses. Interview candidates, inquire about certifications, seek client reviews, and assess their proficiency with current financial technologies.

Look for providers offering comprehensive services such as tax preparation, expense management, and financial reporting. These capabilities will establish robust systems as your business scales. Moreover, expert consultation can yield insights into potential cost savings through automation and tax optimizations.

Small Business Accounting is Fuss-Free with Decimal

We understand that accurate financial tracking is the backbone of any business. Decimal's bookkeeping services are designed to meet your needs and grow with your company. We offer tailored consultations to give you the best solutions, ーwhether invoicing, expense management, or financial reporting.

‍Schedule a meeting with our bookkeeping experts, and let Decimal help you simplify your accounting needs, allowing you to focus more on growing your business.