If you are interested in the history of Bookkeeping, you are going to go on a journey way back, to ancient times. As soon as people began to do trade with one another, there was a necessity to start recording the transactions made between parties. Of course, Bookkeeping has advanced significantly since that starting point. But the premise of maintaining accounts or ledgers has been around for centuries.
Not only are accounts and ledgers required to track amounts owed to one party, they also are needed to track what one owes to other parties. Today we know this as receivables and payables.
We also need to use Bookkeeping to track the health of our finances and that of our companies that we operate. We need to understand how much something may cost us to produce, so that we can determine what to sell that same item for. We never want to be in a position that it is costing us more to manufacture or produce items than what we can recoup when we sell it. That is simply a quick route to financial difficulties.
Understanding the fundamentals of what your costs are (expenses) and what you’re bringing in from customers (sales), will help you understand what funds are actually left over (revenue). A Bookkeeper will understand how to track all of this so that you can get a clear picture of areas that may need adjustment.
An Income Statement, or Profit and Loss Statement will give you a very clear picture of the performance of your finances or business. Think of this similar to a review of one’s household budget after a month. You know what funds you have received. Now you will review your outflow or expenses paid. The difference between the two amounts will be what you have saved or retained. For a business, an Income Statement goes more into detail than a simple budget recap you may use for running a household. It will break down various items so that you can get a more inclusive view of the operation of the business.
This includes different revenue sources, such as different types sales, investment interest and income, and other income sources. Imagine you have a flower shop. You will have income from the sale of the flowers, maybe planters, silk flowers, and the funds collected for the delivery charged. Any type of revenue can be broken down to specific categories so that they can be recorded individually on a ledger account. This will really give you insight as to what items are selling well and what items may not be.
To make this even more meaningful, the expenses related to the different activities of generating income can also be categorized in separate ledger accounts. Using the example of a flower shop, an owner will have different kinds of expenses. There are expenses that relate directly to fresh flowers. And there are expenses related to the purchase of silk flowers or planters for resale. Also, there will be expenses associated with the delivery of flowers.
When you can identify specific expenses that relate to specific revenue, you can fully dig down and determine where you are most profitable and where you may not be. For example, a flower shop will most likely have the highest volume of sales from the purchase of fresh flowers. The florist will have a supplier of fresh flowers that they order from. The difference between the cost of the flowers and the amount of revenue that can be generated by flower sales can change due to any fluctuation in the suppliers pricing. If the supplier has raised the cost of roses, as an example, the flower shop may need to adjust their selling prices as well. This is necessary to maintain the desired profit margin on that item.
Other things can also cause fluctuation on your revenue. We cannot forget operating expenses also affect your bottom line or net revenue as well. If you have a rent increase on the office space you are renting, this is going to affect your net income. If you hire additional staff, you should ensure that you have the revenue flow to support the additional cost, without impacting your bottom line.
We hope that we have not confused or complicated you with the above information. That information is very important to be able to assess and understand. Bookkeepers are ideal solutions to getting all that information sorted out and easily displayed on financial statements.
If you are running your business without a Bookkeeper, it is very similar to driving your car with a blindfold on. Bookkeepers can help you understand where you have come from and where you are heading. Having one on your team will really help your business go places.
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