It’s a rather growing concern for many loan officers and financial entities, that in this time and age we still have many Small Business Owners who are still operating under the old guise; “what I make is what I have left“. If you should ask questions like ‘what are your purchases for the month, what are your expenses for the month? What’s your amount owed to creditors? What are the amounts owed to you from/by customers? or even more so, What’s your
sales or revenue for the month?’ You might be surprised to see the level of stuttering that comes from the lips of most of these entrepreneurs or small business owners in Jamaica. Especially if it is a scenario where accessing a loan is extremely pivotal for your business to survive.
Whats your True Profit?
Let’s say that we’re operating a Grocery or Hardware Store and we take our Sales or Revenue for the month and put it against our expenses for the month. Do you think that we would be able to access our true Net Profit after doing this solely? Sounds naive right? But I can assure you that this is the concept of many small business owners. Not many understand that the nature of operating a business will require you to conduct an Inventory Count at the start and ending of each year. This is extremely crucial in establishing the true amount spent to restock (purchases) throughout the year or month. Hence, why the installation of an automated system is absolutely vital, efficient and effective as all purchases will or can be entered as you restock along the way. Cash Register soft-wares like Quick Books, Cash Register System, POS etc. will save you not only time but money. Bear in mind that when figures like your Opening and Closing Stock are not recorded, your accountant will forced to either estimate those figures or use your purchases throughout the year solely as that Cost of Goods Sold (C.O.G.S.) figure, even though you have stocks on your shelves at the start of the year that were sold. Thus, calculating your C.O.G.S. should be done using this formula:
Say for instance that Company XYZ starts the year with an Opening Inventory or Stock valued at $35,000.00 and made purchases throughout the year valued at $100,000.00 and ended the year with an Inventory valued at $65,000.00. Thus Company XYZ’s Cost Of Goods Sold (C.O.G.S) would be:
$35,000.00 (O/Inventory) + $100,000.00 (Purchases)= $135,000.00 – $65,000.00 (C/Inventory)= $70,000.00 (C.O.G.S)Calculating your Net ProfitNow, let’s take into consideration that we know our Sales/Revenue and your expenses for the year and you now want to know your Net Profit. Take into consideration two things, firstly you must calculate your Gross Profit which includes your Sales/Revenue less C.O.G.S and then your expenses throughout the year is then subtracted. Hence, it’s safe to say that your Net Profit really shows the money that you have left from your Gross Profit (after repurchasing) less all your Expenses (costs to operate the business). Thus, let’s say for example (see exampleii) that:
Example ii:Say that after Company XYZ calculated it’s C.O.G.S. it now wants to know it’s Net Profit for the year 2017. Throughout the year it’s Sales/Revenue figure amounted to $230,000.00 and operating expenses amounting to $95,000.00 which included Salaries, Utilities, Admin & Marketing. Therefore, calculating Company XYZ’s Net Profit would entail:Company XYZIncome Statementas at Dec 31st 2017
Sales $ 230,000.00
(Less) C.O.G.S ($ 75,000.00)
Gross Profit $ 155,000.00
(Less) Operating Expenses ($ 95,000.00)
Net Profit/(Loss) $ 60,000.00Note: Bear in mind that is Company XYZ incurred expenses amounting to $170,000.00, the company would have therefore made a loss of ($15,000.00). Recordingis Key!
Although it might seem repetitive at times, that I continue to stress the importance of recording; consider that it may be tedious at first but by making it a habit it will become an easy skill that is essential to the survival of your business. Imagine a business that operates not knowing it’s Sales/Revenue, Purchases & Expenses for the year? How can or would that particular small business owner really know his or her Net Profit for the year? This business owner would be guesstimating and supposing that they make only an amount that’s left at the end of the month. Which can either be over or underestimated based on the purchases made and expenses incurred. Hence, in it’s entirety, proper recording must be done in order for any small business owner to take his or her business to the level as you must know what works and what does not (See Article 10 Things that Must be Recorded when running your Small Business). And also more essentially; YOUR NUMBERS!
If you need help or further information please feel free to contact us at 1 (876) 545-6928 or BIZcareConsultationAcct@Gmail.com to arrange your consulting session.
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