How to Use Accounting in Business
While that may seem obvious, it is important to understand how a business can make a profit when managing a business. A company needs a good business model and a good profit model. A business sells products or services and earns a certain margin for each unit sold. Number of units sold is the volume of sales during the reporting period. The business reduces fixed expenses for the period, thereby providing operating profit before interest and income tax.
It is important not to mix profits with cash flow. Profit is equal to sales revenue. A business manager should not think that sales revenue is like cash flow and business expenses management is the same. Cash or other assets increase when recording sales revenue. Accounts receivable increases on sales of accounts receivable on credit. Many expenses are reported by reducing an asset other than cash. For example, the cost of goods sold is recorded with a decrease in inventory assets and depreciation expense is recorded with a decrease in the book value of fixed assets. Also, some expenses are recorded with an increase in liabilities or an increase in accrued liability.
Remember that some budgets are better than all. Budgeting offers important advantages such as understanding the business’ profitability and financial structure. It also helps to plan for changes in the upcoming reporting period. Budgeting forces a business manager to focus on factors that need to be improved to increase profits. A well-designed management profit and loss report provides the essential framework for budget profit. It is always a good idea to look forward to the next year. If nothing else, look at your projected profit for the coming year by entering the numbers in your profit record for the minimum sales volume, sales price, cost of production and other expenses.