Your first year in operation can be an intimidating one. You’ll be creating everything from scratch, including your financial books and reports, and setting the foundation for the years to come. While there’s much to learn about tracking revenue and profitability, the basics are easy to grasp; if you’re working as a freelancer or if your business is small, the basics may be all you need.
In any case, putting together a simple ledger (or series of ledgers) to track your year-one revenue shouldn’t take much time or effort.
Creating the Right Documents
Depending on your situation, it may be prudent to create and maintain your financial reports in Excel. Excel is easy to learn, it’s convenient to access, and it has dozens of functions to help you find data—including VLOOKUP, which can help you reference and look up any piece of required information in your sheet.
These are some of the documents you could use to track your business’s money:
- Balance sheet. Your balance sheet is a high-level document that compiles all of your business’s assets and liabilities from day one. It’s a valuable tool for understanding your overall financial position, and can answer most of your financial questions.
- Profit and loss statement. Sometimes called an income statement, this document is focused on evaluating your company’s profits and/or losses. With it, you’ll record all your revenue and compare it to all your expenses, including the cost of goods sold and all your overhead.
- Cash flow statement. Your cash flow statement will help you determine how your money is flowing, so you can easily tell if you have enough cash on hand to continue paying your bills. Even if you’re making a sizable profit, you still need to maintain a positive cash flow if you want the business to survive.
Tracking the Right Information
If you were simply recording revenue, you could keep track of it easily, noting it by individual line item and recording the amount due for each one, eventually totaling those figures for each relevant period (e.g., weekly, monthly, annually, etc.). However, if you want a decent perspective on your company’s financial performance, you’ll need to track more than just revenue.
Consider tracking:
- Sales/revenue. Your revenue, determined by your sales, is the most important figure in your business to track, and it’s relatively easy to do so. Depending on how you’re billing and logging sales, you’ll simply write down the dollar value of what you sold. If you’re using Excel to do this, you’ll keep it confined to a single column, with a line item for each type of good sold.
- Gross wages and/or overhead. You’ll also need to keep track of your gross wages and your other overhead expenses. Raw materials, labor, and monthly costs (like rent) should all be included here. This doesn’t directly affect your revenue, but will be a useful tool for providing context to the revenue you earn.
- Net profit. Your net profit is easily calculated when you have your revenue and your expenses available. Simply subtract all your expenses from all your revenue for a given period, and you’ll end up with your total profitability (or your total losses, if you’re spending more than you’ve made). Don’t be surprised if you operate for a net loss during your first few months, or even the first year of operations.
- Total inventory. It’s also helpful to keep track of your business’s inventory, which you can do using the same types of spreadsheets and formulas you’ve used for other accounting purposes. If your inventory numbers start climbing too high, it can eat into your profitability. Depending on the nature of your business, inventory can also inform you about the health of your business.
- Quick ratio. You’ll also want to know your business’s quick ratio, which is an indicator of your short-term liquidity, and is vital to understanding your cash flow statement. This ratio compares your liquid assets (i.e., cash) to your current liabilities, giving you perspective on your current ability to pay your bills.
Hiring an Accountant
If all this reporting seems too complex, or if you don’t want to be bogged down with the chore of recording sales or revenue as you recognize it, you may wish to hire a professional accountant. They’ll be able to handle all these processes, and probably more efficiently and thoroughly than you could.
That said, it’s entirely possible to learn how to track your own revenue. In fact, doing so can give you a better firsthand perspective on your company’s profitability, and lead you to smarter financial choices.
Keep a close eye on your sales and profits in your first year, and gradually work to refine your process from there.
