GUIDE TO BASICBOOKKEEPING

As a small business owner, you have to get used to having a lot of balls in the air at

one time. You are probably used to working countless hours and constantly jumping

from one thing to another in order to keep afloat. So when you add in something

like bookkeeping, it can often feel like an extra headache to even understand it, let

alone take care of it every month. That’s why we are presenting the Mazuma Guide

to Basic Bookkeeping. Whether you know some basic bookkeeping and you want to

learn more, or your level is closer to “what is bookkeeping?” we hopefully have some

answers for you. And if you really hate bookkeeping, you can even skip straight to the

end, and see how Mazuma can take it off of your hands altogether!

MAZUMA MAKES IT EASY

01What is Bookkeeping?

02Bookkeeping 101: How Does it Work?

03Why is Bookkeeping Important?

04Where to Start? Bookkeeping for Dummies

05What is Profit and Loss Statement?

06What is Balance Sheet?

07Analysis and Budgeting

08Conclusion

TABLE OF CONTENTS

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So let’s start at the beginning: what is bookkeeping? Some would say that

bookkeeping feels like taking a small business owner’s brain and pounding

nails into it. But when you break it down, it’s just the process of taking

individual transactions from bank or credit card records, grouping them

using accounting basics, and then adding them all up. It’s that simple!

It’s that tricky little component of “accounting basics” that can create the

aforementioned ‘nails.’ But when done properly, the numbers tell a story

about your business that you never could have learned without the nebulous,

yet tedious task of bookkeeping.

Please note: before we go much further you should understand

that the concepts explained in this article are intended to illustrate

“cash basis” accounting. There are a multitude of accounting

principles and procedures that will not be covered herein because

they don’t apply to most small business owners.

The origins of modern day “double entry accounting” go back thousands of

years. If you’ve ever walked away from a conversation with an accountant

and felt like they were speaking another language, you won’t be surprised to

hear that they once belonged to the same industry as lawyers. There was a

day when lawyers offered accounting services and accountants offered legal

WHAT IS BOOKKEEPING?

So let’s start at the beginning: what is bookkeeping?

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services...as if one subject of over-complicated jargon wasn’t enough!

By the middle of the 19th century, the industrial revolution was growing

strong. New limited liability entities— such as corporations — springing up

everywhere compelled professionals to find better ways (imagine that...

innovative accountants!) to report financial information to shareholders.

This demand for information sparked a development of a set of universal

standards that shareholders could use to make investment decisions — what

became the basics of bookkeeping; and accounting has never looked back.

So what is bookkeeping as it pertains to us? If you took a look at the financial

statements of a large company like Costco, you’d find a long story, told by

a hundred pages of footnotes. However, in our world of small business, you

don’t have to go that deep to get the critical information you need to run

your business well. The end goal of bookkeeping for 90% of the businesses

out there is the profit and loss and balance sheet statements. In short, small

business bookkeeping is therefore the process of collecting transactions into

these common financial statements.

Let’s start with the most common source document used in the world of

business: a bank statement. Somehow we’ve got to get all the transactions

listed on that bank statement into a computer program, so that we can

BOOKKEEPING 101: HOW DOES IT WORK?

So now let’s get into the nitty gritty:bookkeeping 101.

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categorize and summarize them. There are many different platforms out

there that facilitate this...but they usually come down to either typing the

information into an accounting software, or importing the information into

the software.

After the information has been input into the accounting software, each

transaction has specific tags to describe that transaction:

Date

Payee or Payor

Amount

The one tag or label that is needed to complete the bookkeeping process

of entering the data is the “category,” which from now on will be referred

to as the “account.” The account is just an additional label you give the

transaction to identify what it is. For example, you may be familiar with the

“Office Supplies” account, or maybe the “Travel” account. These accounts just

add information to your transaction so it can be grouped with other similar

transactions. You can also add a “Memo” or “Notes” to your transaction to

provide even more information to it, but it’s the account that acts as the

primary key for grouping transactions together.

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NINE-TRANSACTION EXAMPLE

So for example, imagine we have the following list of nine transactions from

your bank statement:

Step one is to get the information into your accounting software and then

assign them to the relevant account. So what account would you use for each

of those transactions? Maybe the following:

6/1/2018 Chick-fil-A $12.00

6/3/2018 Uber $40.00

6/5/2018 Office Depot $100.00

6/21/2018 Amazon.com $50.00

6/22/2018 Amazon.com $200.00

6/23/2018 Deposit $1000.00

6/25/2018 Check #101 $300.00

6/29/2018 ATM Withdrawal $60.00

6/30/2018 Deposit $500.00

DATE PAYEE/PAYOR AMOUNT

6/1/2018 Chick-fil-A $12.00 Meals

6/3/2018 Uber $40.00 Travel

6/5/2018 Office Depot $100.00 Office Supplies

DATE PAYEE/PAYOR AMOUNT ACCOUNT

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6/1/2018 Chick-fil-A $12.00 Meals

6/3/2018 Uber $40.00 Travel

6/5/2018 Office Depot $100.00 Office Supplies

6/21/2018 Amazon.com $50.00 Office Supplies

6/22/2018 Amazon.com $200.00 Tools

6/23/2018 Deposit $1000.00 Income

6/25/2018 Check #101 $300.00 Rent

6/29/2018 ATM Withdrawal $60.00 Tools

6/30/2018 Deposit $500.00 Income

Easy as pie! Now that you’ve assigned each transaction to an account in the

software, you can generate a profit and loss statement, which would look

something like this:

Income

Total $1,500

Expenses

Meals $12

Office Supplies $150

Tools $260

Travel $40

Rent $300

Total $762

Net Profit

Total $738

MY SMALL BUSINESS FROM JUNE 1 TO JUNE 30, 2018PROFIT AND LOSS STATEMENT

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You’ve now seen the magic behind the curtain! Of course, this is a simple

example with very few, very simple transactions, but it illustrates the process.

As you can imagine, when there’s hundreds or thousands of transactions

involving balance sheet accounts, in addition to the profit and loss accounts,

things can get pretty hairy.

Why not just monitor the bank account balance like you’ve always done?

There are four really good reasons to go through the hassle of learning the

basics of bookkeeping, or at least finding a way to keep a good set of books.

STAYING ORGANIZED

If you were asked how much you spent eating out last month, could you give

a good answer by just looking at your credit card or bank statement? Or what

if the question was about your marketing efforts — how much did you spend

on marketing last year, and was it worth it? Or maybe a more important

question, what did you spend your marketing dollars on, and did it produce

the return you were looking for?

This is just the beginning of the information that becomes available to you

when you have a set of books. When you’re asking yourself these questions

it may not be a big deal, but what if a bank or investor has questions and all

WHY IS BOOKKEEPING IMPORTANT?

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So why bother with all this bookkeeping mumbo jumbo?

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you have for an answer is a blank stare? Not good. This leads us to the next

reason why bookkeeping is important.

COMMUNICATING VALUE

The reality is that if you don’t have a profit and loss and balance sheet for

your business, there is no way to communicate the value of your business to

outsiders. A bank will not loan you money if they don’t know what’s going on

inside your business. An investor, other than your mom, won’t give you a dime

without some evidence that their dime could produce more pretty coins

after giving it to you. Hence the hundred page financial statements produced

by large businesses every year — they need to explain everything that’s going

on inside their business to the shareholders, in order for those shareholders

to feel ok about them using their money.

Now you may not have plans to take on investors or even borrow money from

a bank, but is there any possibility that you’d want to sell your business down

the road? If so, historical financial statements are an absolute requirement.

GOOD DECISIONS AND BUDGETING

By staying organized and having a record of performance to analyze, you

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actually know more about your business. And you know what they say, ’good

inspiration is based on good information.’ You may be endowed with an

entrepreneur’s gut that leads you everywhere you want to go in business, but

how much more powerful would you be if you merged that “gut feel” with a

mind full of knowledge about your business? Am I going to invest a thousand

dollars in advertising this month? Will this new piece of equipment be worth

it in the end? Can I afford to hire an employee? These are decisions that are a

little too risky to make without good information at your fingertips.

Financial statements represent activity, as of a certain period of time. Each

month, quarter, or year becomes a benchmark by which you can measure

your progress.

And even better than looking backward is the new found ability to look

forward and budget for the future. With enough historical information

to review, you can identify trends and project those into the future. How

powerful is that?

“When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.”- Thomas S. Monson.

Holding yourself accountable to predetermined benchmarks and budgets

will greatly increase your chances of success. And if success is not in the deck

of cards for you, measuring yourself will make you aware of pending failure

much sooner!

TAXES AND REGULATORY COMPLIANCE

It’s that unfortunate certainty these days: death and taxes. If you don’t have

your small business’ bookkeeping done, the tax return becomes difficult

to prepare with integrity. You’ll most likely pay too much or too little taxes

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without solid financial statements to use as the basis for the numbers you

put on the forms. For a small business, tax rates can make all the difference.

Who wants to go through life wondering if they’re going to get slammed

with a huge tax bill, just because they weren’t sure if their tax return was

right?

At the risk of beating a dead horse, the idea of budgeting must be

mentioned here again. Especially for a small business, tax is something you

want to pay as little of as possible — which is not against the law! But the

taxes that you end up having to pay should be budgeted for; if you can’t

avoid them, plan for them. Without good bookkeeping records, you won’t

even have the chance to see the IRS freight train coming!

WHERE TO START? BOOKKEEPING FOR DUMMIES

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Now that we’ve flown over this bookkeeping concept at the 10,000 foot level,

let’s turn this theory into practical, basic bookkeeping steps you can take to

get it done! So let’s go over some of the first steps to take, before a deeper

dive into the basics of bookkeeping.

CHOOSING ACCOUNTING SOFTWARE

The days of keeping your books outside of a computer program are long

gone. Accounting software is not only very cheap, but will be necessary to

keep you on track with your bookkeeping. A spreadsheet is the next best

alternative, but unless you are extra “spreadsheet savvy” — and are willing

to put in a lot of extra time developing your own system — you won’t get

the functionality or reports you need. So, search the market for accounting

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software and you’re sure to find something that fits your needs. But next up,

you’ll have to actually learn how the software works.

As a typical small business owner, you have an unfortunate disadvantage...

you’re not only facing the accounting/bookkeeping learning curve, but

the accounting software learning curve too! But rest assured, the curve

associated with learning the principles of bookkeeping are much steeper

than the curve with the software, especially if you’re somewhat capable on a

computer.

Just one word of warning however: accounting software is notorious for

lulling you into a sense of security and assurance that you’re doing everything

correctly, when in fact you’re often not! They’ve made it so “user friendly”

that you feel like it’s all going fine, only to find out when you send it over

to your tax professional that it’s all wrong. This is another thing that makes

understanding the basics of bookkeeping valuable.

All that said, find a software that has a free trial and see how it goes. If it

doesn’t go well, look for an affordable outsourced accounting service that will

take care of it for you.

SETTING UP YOUR CHART OF ACCOUNTS

As you recall from our demonstration of putting together a profit and loss

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statement, you need to specify “accounts” that you can categorize your

transactions within. Your accounting software will most likely have a default

chart of accounts all ready for you to use, but you should tailor these to your

own needs. Remember, these are the labels you’re going to see on your profit

and loss and balance sheet statements — they should be labels that make

sense to you, and give you the understanding you’re looking for.

Feel free to create your own accounts, but don’t get too detailed. Your own

custom accounts can be very helpful, but they can get out of hand very

quickly. For example, a few different accounts to isolate sales from various

marketing channels might make sense, such as:

Google Income

Amazon Income

Subscription Customers

One Time Sales

However, it’s easy to go overboard, especially when tracking expenses. It’s very

common to see overly complex charts of accounts in new businesses because

they start out wanting to track every little thing, but they end up not being

able to step back and summarize the results. For example, the following

accounts may be too detailed:

Office Supplies - Paper

Office Supplies - Envelopes and Stationary

Office Supplies - Printer Ink

Office Supplies - Stamps

Office Supplies - Other

Travel - Rental Car

Travel - Flights

Travel - Parking

Travel - Other

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Hopefully you see how that begins to be unnecessary detail. Combining

all the office supplies together is probably more beneficial than knowing

how much you spent on stamps during the month. So a word to the wise:

summarize as much as your management style is willing to allow for. Doing

so not only helps you comprehend your reports quicker, it also saves time

when coding transactions; it’s a lot quicker to pick from a list of 15 accounts

than it is to pick from a list of 100 accounts.

TYPES OF ACCOUNTS

So far, all of the accounts referred to in this article were profit and loss

accounts. However, as you will come to find out, balance sheet accounts are

an important piece of the puzzle. We will go into the differences between

a profit and loss statement and a balance sheet in detail soon, but for now,

just know that income and expense accounts belong to the profit and loss

statement, while assets and liability accounts belong to the balance sheet. So

you won’t ever see the following accounts on a profit and loss statement:

• Cash (Asset)

• Inventory (Asset)

• Credit Card (Liability)

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• Loan (Liability)

These balance sheet accounts all represent balances for an amount owned

by you (an asset) or an amount owed by you (a liability). You will need to

set up a cash (representing your business bank account) or a credit card

account in order to begin entering transactions. The default chart of accounts

will most likely contain these accounts already, you can rename the defaults

to reflect the actual name of your account.

SETTING UP VENDORS AND CUSTOMERS

Most accounting software allows you to setup vendors and customers as

you go, but it may be more convenient to add all the details about your

customers and vendors at the beginning. As you recall from our Nine-

Transaction Example, there was a “Payor/Payee” column, or in other words

“Customer/Vendor” column. The software likes you to preset the customers

and vendors so it can report on them, and so it can remember what account

you categorize their transactions to.

If you’ve got a list of customer or vendor information in a spreadsheet, for

example, you’ll probably be able to import it into the software and save them

all at once.

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START ENTERING DATA...SLOWLY

Once the chart of accounts is set up, you can go ahead and begin entering

transactions. Most modern accounting software allows you to “link” your bank

accounts and begin automatically downloading your transactions...DON’T

DO THAT YET! It is smarter to enter your first transactions by typing them in

yourself. This is an extremely valuable learning opportunity, so take it slow.

Enter in 5 transactions, then view your profit and loss statement. Enter in 10

more transactions, then view your profit and loss statement. View the balance

sheet also and see what’s happening to your bank balance as you go along.

This process will allow you to really connect the dots between what you enter

in the system and how it shows up in your reports.

By taking it slow and understanding what’s happening as you take the first

baby steps, you allow the basic bookkeeping concepts to sink in. If you link

your bank account and import a hundred transactions all at once, you’re

likely to be confused right off the bat and not understand what’s going on.

Also, sometimes the bank linking and transaction importing process can

be complicated in itself — no need to put your brain through that. Get at

least the first month done by hand, and then if you’re feeling great about

everything, go ahead and find more efficient ways to get the data in the

system.

WHAT IS A PROFIT AND LOSS STATEMENT?

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We briefly covered the nuts and bolts of a profit and loss statement in our

Nine-Transaction Example. Let’s walk through it piece by piece, using a

typical Mazuma profit and loss statement:

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Header - This is the header of your profit and loss statement:

Example Company

Profit and Loss Statement

From 6/1/20XX to 6/30/20XX and from 1/1/20XX to 6/30/20XX

On the first line you’ve got your company name, “Example Company”.

The second line is the name of the report, “profit and loss statement”, which

means the same thing as Income Statement.

The third line indicates the date ranges which are being reported. In this

example, we are reporting figures that represent the month of June, and

figures that represent January through June.

Income - This section displays the sales or income that was generated by

your business for each of the two time periods:

Month YTD

Google Income $10,000 $60,000

Subscription Income $ 2,000 $12,000

Total Income $12,000 $72,000

We’ve set up two income accounts in our chart of accounts. Remember that

if you have set up an account but haven’t coded any transactions to it yet, it

probably won’t show up on your profit and loss statement report.

The column titled “Month” is the total income that was received during June.

The column titled “YTD” is the total income that was received from January

through the end of June, it stands for “Year to Date.”

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The titles of these columns can vary, and of course the timeframe you’re

reporting on will vary, but this is a common presentation.

Expenses - This is the expense section of your profit and loss statement:

Expenses

Accounting $ 125 $ 750

Insurance $ 100 $ 600

Rent $ 1,000 $ 6,000

Marketing $ 500 $ 3,000

Office Supplies $ 120 $ 720

Telephone $ 110 $ 660

Travel $ 300 $ 1,800

Total Expenses $ 2,255 $13,530

Similar to the Income section of the statement, we have the list of expense

accounts, and two columns with amounts totaled at the bottom. Within the

month of June, you paid $125 for your Mazuma Accounting fee, $100 for

Insurance, $1,000 for Rent and so on. The Total Expenses you paid out in June

was $2,255, while you’ve paid a total of $13,530 for the January through June

period of time. Nice to know, huh?

Net Profit or Loss - This last section is the “bottom line,” as they say, telling

you whether you made money or lost money:

Net Profit $ 9,745 $58,470

In this case, our total income, minus total expenses, results in a nice net profit

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of $9,745 for June and $58,470 for your YTD total. In the case where total

expenses exceed total income, we would have a net loss and the bottom line

number would be negative.

Let’s put all our sections together and see how it looks:

Example Company

Profit and Loss Statement

From 6/1/20XX to 6/30/20XX and from 1/1/20XX to 6/30/20XX

Month YTD

Income

Google Income $10,000 $60,000

Subscription Income $ 2,000 $12,000

Total Income $12,000 $72,000

Expenses

Accounting $ 125 $ 750

Insurance $ 100 $ 600

Rent $ 1,000 $ 6,000

Marketing $ 500 $ 3,000

Office Supplies $ 120 $ 720

Telephone $ 110 $ 660

Travel $ 300 $ 1,800

Total Expenses $ 2,255 $13,530

Net Profit $ 9,745 $58,470

Looks great! Now you can move on to asking yourself, “Is that as profitable as

I want to be?”, “What can I do to be more profitable?”, “What are my numbers

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going to look like for the rest of the year...will I make enough money to buy

that new car I’ve been eyeing lately?”

Stacking these numbers up month by month becomes a powerful tool now

at your disposal.

WHAT IS A BALANCE SHEET?

Now you’re getting into some deep water!

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But don’t worry, most of the balance sheet is actually fairly simple to

understand, because we inherently comprehend what assets and liabilities

are. These are concepts we deal with in our daily personal lives, whether we

run a business or not. It’s the mysterious equity section that often muddies

the water. Let’s break the balance sheet down into sections and step through

it:

Header - This is the header of your balance sheet:

Example Company

Balance Sheet

As of 6/30/20XX and 5/31/20XX

Looks very similar to the profit and loss statement, right? However, you’ll

notice that the third line looks a little different. This subtle change in

verbiage actually represents a huge concept that differentiates the balance

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sheet from the profit and loss statement.

Recall that the profit and loss statement was presented as a “period of time,”

showing transaction activity that occurred between a beginning and ending

date. The balance sheet on the other hand presents balances in accounts “as

of” a specific date.

So instead of representing a period of time, the balance sheet represents a

snapshot in time. In this example, we are looking at the balances in specific

accounts on June 30 and on May 31. Let’s move to the asset section and it

will start coming together.

Assets - This always the first section of the balance sheet, and contains all the

assets that belong to the business:

6/30/XX 5/30/XX

Hometown Credit Union Chk $ 5,050 $ 4,025

Equipment $ 500 $ 0

Work Truck $30,200 $30,200

Total Assets $35,750 $34,225

So now we know that on June 30th, the company had $5,050 in their

checking account and $500 of equipment on hand. We also can see that

the truck that was purchased cost $30,200. The balance of the Work Truck

account did not change from May to June, which makes sense because

once the truck is purchased, you don’t end up buying a little more truck...or

selling a piece of your truck from month to month. But your cash balance is

very likely to change, because businesses are spending and receiving cash all

throughout the month.

We can also see that the business purchased equipment for $500 in June.

Our balance sheet tells us that the business owns a total of $35,750 in Assets

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at the end of June and $34,225 at the end of May. If we have more assets

than we owe in liabilities, we are what is known as solvent, which is a good

thing! Let’s find out if that’s the case by looking at the next section of the

balance sheet.

Liabilities - The next section of the balance sheet is always liabilities. This

section represents amounts, or balances, that the business owes other people

or other businesses:

Credit Card $ 2,025 $ 2,575

Truck Loan $26,000 $26,525

Loan from Dad $ 6,000 $ 6,000

Total Liabilities $34,025 $35,100

These balances show us that the company has a balance of $2,025 on their

credit card as of June 30th. Looks like they made a payment on the truck

loan, which brought the balance down to $26,000, and that there was no

payment made to Dad on that loan. Total balance due, aka Total Liabilities,

was $34,025 as of June 30th and $35,100 as of May 31st.

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With total liabilities being so close to the total assets, the company is walking

the fine line of being solvent, however, that doesn’t mean they aren’t making

good money.

As we saw in the profit and loss statement above, the company earned

$9,745 in June alone, and $58,470 for the whole year. So where is all that

money going? It’s not sitting in their bank account, and it wasn’t used to pay

down the credit cards or loans, where could it have gone? This leads us to our

final section of the balance sheet.

Equity - The equity section of the balance sheet reflects the historical

profitability of the company, as well as the transactions that occur between

you — the owner — and the company itself. It is quite honestly the most

complicated section of the basic financial statements, so don’t freak out if it

doesn’t all make sense. Let’s take a look:

Owner Contributions $10,000 $10,000

Owner Distributions ($96,745) ($89,600)

Net Profit $58,470 $48,725

Retained Earnings $30,000 $30,000

Total Equity $ 1,725 ($ 875)

These accounts illustrate a few elements that can be useful to you:

First, the owner contributions and owner distributions accounts are exactly

what their names suggest: the cumulative amount the owner put IN to

the company, and the cumulative amount the owner has taken OUT of the

company.

That idea of “cumulative” is important to remember, these balances reflect

“inception to date” figures, or the total amount that the owner put in or took

out, since the beginning of the business.

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Second, the net profit line item is the year-to-date net profit. If you look back

at the profit and loss statement we reviewed above, you’ll notice the net

profit under the YTD column matches this total in the equity section.

Lastly, the retained earnings account represents the cumulative net profit

from all prior years. So in this case, the retained earnings figure indicates that

company generated $30,000 of net profit during all years prior to January 1st

of the current year.

So again, the net profit line shows the profit generated this year, and the

retained earnings line shows the profit generated for all time prior to this

year. Pretty cool, huh?

Here comes the part where you find out why it’s called a “balance” sheet...

wait for it...it balances! If you add up total liabilities ($34,025) and total equity

($1,725) it equals $35,750. And what do you know? That happens to match

the total assets number. The world is in order for an accountant when total

assets = total liabilities + total equity.

You should certainly be proud of yourself if you’ve made it this far! You have

traversed the treacherous set of principles that make up the fundamental

world of double entry accounting. Okay, you may not be ready to take the

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CPA exam, but as you work repeatedly with these concepts in your business,

you’ll find them becoming more and more familiar. You may eventually even

be able to casually tell your friends...“Yeah, I know what’s goin’ on with my

books.” Try not to get too cocky though...

ANALYSIS ANDBUDGETING

So now what?

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You know a bit about financial statements and understand the basics of

bookkeeping, but how does this knowledge help you in your business? With a

basic understanding of accounting, you can begin to use financial statements

to help you budget and analyze what’s going on in your business — and thus

make better decisions about the future.

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Let’s look at a set of monthly financial statements, January through April:

Example Company

Profit and Loss Statement

Jan Feb Mar Apr

Income

Google Ad Income $10,000 $ 9,500 $ 8,500 $ 7,000

Subscription Income $ 2,000 $ 4,000 $ 5,500 $ 9,000

Total Income $12,000 $13,500 $14,000 $16,000

Expenses

Accounting $ 125 $ 125 $ 125 $ 125

Insurance $ 100 $ 100 $ 100 $ 100

Rent $ 1,000 $ 1,000 $ 1,000 $ 1,000

Marketing $ 500 $ 1,000 $ 2,500 $ 2,000

Office Supplies $ 120 $ 150 $ 200 $ 180

Telephone $ 110 $ 110 $ 110 $ 110

Travel $ 300 $ 400 $ 200 $ 300

Total Expenses $ 2,255 $ 2,885 $ 4,235 $ 3,815

Net Profit $ 9,745 $10,615 $ 9,765 $12,185

ANALYSIS

As you can see, things are headed in the right direction for this company.

Revenue is going up and so is net profit; that’s what we like to see! Now if

you were just staring at the bank account balance at the end of each month,

you might be able to tell that things are going well, simply because you’re

not running out of money. But how much more can you understand about

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how this business has performed this quarter, when you have these figures to

analyze? Tons!

Focusing on the income section, we can see that the new subscriptions are

the main driver in our increased net profit. Google Ad income is actually

dropping off, but we are more than making up for it in recruiting subscribers.

• What does that mean?

• Where should we be focusing our efforts?

• Do we want to spend our time getting Google Ad Income back up?

• Or would we be better off just focussing on subscribers?

If this was your business you’d now be well equipped to answer those

questions.

Now let’s analyze the expense section. Things are trending pretty steady

overall, except for our marketing costs. We’ve increased our marketing spend

substantially since January, especially in March.

• Was that marketing investment worth it?

• It seems to have increased our subscriber count. Did it increase

our subscriber count as much as we hoped it would?

• What do we think would happen if we increased our marketing

spend beyond the peak $2,500?

• Are there other marketing avenues that might give us a bigger

bang for our buck?

Again, lots of questions surface that can be answered when you have this

insight into your business.

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BUDGETING

We’ve briefly touched on the simple analysis that can be done when viewing

a set of monthly profit and loss statements. How can monthly statements

help us with budgeting? Well, if you boil budgeting down to its most

fundamental principles, it’s about trends (things you can’t always control) and

behavior (things you can control).

Consider your personal or family budget, there are both trends and behavior

affecting how much money you have each month. A trend of sickness in your

home may cause a few more doctor visits and medical bills than you were

expecting. Things you can’t control pop up here and there, but that doesn’t

mean you can’t try to plan for them.

Conversely, behavior — things you choose, and can thus control — will also

impact your family budget. For example, if you choose to eat out every night

instead of cook at home, you’ll likely spend much more on food during the

month. That’s a behavior that can be changed and would affect the balance

in your bank account at the end of the month.

Business is the same, trends in the economy, your competition, or even

among your vendors can alter your ability to generate revenue or afford to

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provide your service. Those trends are often out of your control, but by looking

ahead, you may be able to have a contingency plan in place.

Behavior also affects business the same way it does the family budget. You

get to choose whether to hire an extra employee or pick up the slack yourself,

choose whether to fly first class or coach, choose whether to hire a marketing

firm or learn how to manage an ad campaign on your own. There’s obviously

no ‘right’ answer to those questions — it depends on your situation and what

you believe is best.

But whatever trends you’re facing, and whatever behavioral choices you

make, you have the ability to look ahead and at least make a good guess

at the financial consequences. Because we know what happened January

through April, we can make up our own profit and loss statement (in Excel for

example) for May based on any scenario. What types of industry or economic

trends might impact your business? How could you change your behavior to

positively impact your Net Profit? Pull up a spreadsheet and start plugging

numbers into your own profit and loss statement as you explore those

questions.

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