Now that 2023 is in the rear mirror, are you doing a review of your business financials? This is what I’m doing right now and I’ve already gained a few insights. I thought I’d share how I got there.
It all starts with data
I’ve written previously that one of the two most valuable tools I use is my business accounting system. This may sound odd coming from a creative type but I can assure you, it’s not. Or at least it shouldn’t be. If you have your own business and aren’t making a good effort to track how your business is performing, you’re putting your future success at risk. This is especially important for a person like myself because we creative folk like to behave like the boring business stuff isn’t a priority. Doing this sort of review requires data that’ll come from your business accounting system. If you’re not tracking your numbers, how do you expect to make informed decisions?
Good data requires a system
If you finished 2023 and didn’t have an accounting system in place. I strongly encourage you to make finding one suited to your business your first step in 2024. Over the past year, I’ve really learned a lot from my numbers to help me refine my business operations and strategy.
What to use?
I use Quickbooks Online, a web-based platform which is more than capable for my micro-business needs. (Please note: This isn’t a commercial for Intuit. Quickbooks is just what I happen to use.) I had used the desktop version for my previous businesses so I was already familiar with the interface and this current version is pretty similar to what I remember. I like that since it’s web-based, the platform worked across my multi-device, Mac-based studio setup. And I’ve found the mobile app is pretty useful too. Tailoring the software to your business up takes a bit of time and it helps if you have some basic accounting knowledge. If not, I’ve found there’s lots of folks out there that can do the set up with you for a fee. I was able to do mine myself with only a few questions to my tax advisor. Additionally, I do all the ongoing inputting, reconciling and required maintenance myself. I’ve found none of this too difficult or burdensome because my business is still pretty small. And because Quickbooks is big in the small business space, I found that whenever I got stuck it was easy enough to find relevant troubleshooting and how-to information online. Initially, the cost was kind of scary. I paid $30/month (once the sign up special wore off) and then around mid-year I switched to paying annually because Intuit, the company that owns Quickbooks, offers the same at a 10 percent discount.
Other available options
While Quickbooks suits my needs I’m sure any similar accounting system oriented toward small businesses (Xero, FreshBooks, Wave, etc.) would also work just fine. Just pick the one that best meets your needs for the price you’re willing or able to pay. But regardless of which system you choose, do choose one. It makes all the rest of this so much better.
Making it your own
Regardless which accounting system you use for your business, be sure to take time at the start of the year to customize your chart of accounts (your categories of income, expenses, etc.) so that the data-driven reports you’ll eventually pull make sense for your business. I did this in consult with my tax advisor to come up with my tailored list of accounts. In my prior businesses, I just didn’t do this well enough. Instead I mostly used the generic template chart of accounts built into the software and tried to call that good. The problem was the reports I got then didn’t really tell me what I wanted to know. This time around, I clearly defined the sources from which I reasonably expected to earn income, and then edited the expenses similarly. As the year progressed, I made further refinements to my list whenever something came up, usually an expense, that I really wanted to track. The payoff is that I now I know exactly where my income is coming from and which categories are driving my costs. When I look at my periodic reports, I really see my business in the numbers.
Where to focus?
Three reports, the Statement of Cash Flows, Balance Sheet, and Profit and Loss Statement, are commonly recommended as the most important to reviewing your business performance. So, I focused on those. As I became more familiar with what each report contained, I did learn more about my business. For example, I learned that I really like reviewing the Profit and Loss Statement. It tells me in detail where my income is coming from, and which categories are driving my expenses. I’ve also found that reviewing Profit and Loss reported as a percentage of income is a really good way to understand if the numbers feel right, if that makes any sense. By the end of the year I felt comfortable in making projections about where my numbers would end up.
All about the Insights
You got a system, you’re using it, and the numbers in your reports make sense. Great! The next step is to ask yourself what you’re going to do with what you’ve learned. These are the all important insights that’ll help you be strategic. I’ll give a couple of examples.
- Income. I noticed that while I hit my first year revenue target, a big chunk of my income is from one category. While this isn’t automatically a bad thing, knowing this has caused me to think about if my income needs more diversity. For 2024, I’d like realize an increase in total income while also growing a few additional income streams.
- Expenses. Another thing I’ve noted is what percentage of my total income is represented by expenses and importantly, which expense categories are driving those numbers. As a 2023 was my first year, I had a number of one-time startup costs that I don’t anticipate in 2024. So, already I’ve got a goal in place to reduce my total expenses, and also reduce expenses as a percentage of my total income.
These are just the beginning of the sort of questions I’m thinking through now. I’m proud of what I’ve been able to accomplish over the past year. My goal is to make sure I get to keep it going. If you’re doing your own financial review, congratulations. If not, I hope I’ve inspired you to at least look into it.
Continue doing good. All the best to you in 2024.