If you attend a baseball game, they have a scoreboard, don’t they? Same goes for football and golf, right?
Does your business have a scoring system? If not, it needs one…badly.
The good news is that your scoring system is already built into your accounting software. Your scorecard is called the Income Statement (also known as the Profit and Loss Statement). Regardless of what you call it, this report gives you the inside story on your hits and misses, home runs and errors.
The basic components of an Income Statement are:
Revenues - a summary in dollars of the products or services you sold
Expenses - a summary in dollars of the checks written and bills paid
Cost of Goods Sold - a special type of expense account for those businesses that carry inventory
The Income Statement can be run for any given time period. Ideally, you’ll have one for each month of operations. To make the report even more meaningful, you can compare the current month results to those of the prior month or even the same month last year.
The bottom of the Income Statement tells you right where you stand by identifying either a net profit or net loss. Net profit means that your revenues were higher than your expenses (a good thing!). Net loss means your expenses were higher than your revenue (a bad thing).
While accounting software makes it easy to generate the Income Statement, it is critical to ensure the data on the report is accurate. Breakdowns in your accounting system can very easily distort the results of this report and lead to bad or misinformed decisions about your business.
It is essential to have confidence in your accounting system so that the scorecard you see each month is an accurate reflection of your activities. In golf, you are penalized for keeping the wrong score. In business, the penalties can be far worse.
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