089 Dos and Don'ts of Income Categories on Your Profit & Loss Statement
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We’re exploring a crucial aspect of small business finance: income categories. Understanding and organizing your income streams is key to unlocking your business’s full potential and improving your profit margins. Join me as I break down how to identify your various income sources, when to create subcategories, and why focusing on these categories can simplify your bookkeeping and financial reporting.
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Hello, welcome to an episode and episode the episode. Welcome to money. Through ease, the podcast where we're turning your numbers into magic. I'm the numbers which Regan Bashara I'm an advanced certified QuickBooks Online Proadvisor, and I've also been doing bookkeeping and public accounting.
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In the United States.
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For 10 years.
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So I know what I'm talking about when it comes to bookkeeping, bookkeeping systems, because I've created hundreds of them over the years and teaching you how to create your own bookkeeping system for your business, for your self-employment, how to do it correctly, and how to do it consistently, because that's probably the part that people struggle with.
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The most this episode of money through ease Once Again is sponsored by the Bookkeeping Foundation kit.
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This is my quick digital course that walks you through setting up a bookkeeping system that is simple and easy for you to use and manage. Plus I teach you how to do bookkeeping consistently because doing things consistently is damn near impossible when you're a human with a human brain.
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And maintain a consistent routine. Plus, when you purchase the kit, you'll get 30 days free access to my private virtual community with me and all of my clients, after which you can join the community for just $7.00.
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Plus every single month you get a new content tutorial lesson from me. This is specifically made for QuickBooks Online users, but it is going to be useful and resourceful and helpful to anybody that's using an accounting software or even a spreadsheet to keep track of their business.
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Revenue and expenses. Today's episode of money through ease, we're going to talk about income categories, why we have to focus on them in the 1st place and how to identify them for your business.
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So to get started, we gotta answer the question why do we need to even focus on income categories? Can't I just say sales on my profit and loss? Can't I just say revenue? Well, I mean, you could say that that's essentially what it boils down to when it gets reported on the tax return.
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Each year, but in the meantime, it's going to be especially useful for you to know how you're.
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And we set that up by creating income categories that make sense for your business. It would not make sense for you or landscaping business owner to have hamburgers and hot dogs revenue on your profit and loss in the same way.
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That for a restaurant that does sell hamburgers and hot dogs to have lawn maintenance as a revenue category on their P&L, each businesses income categories are going to be unique even within industries. And This is why.
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Every business is going to have different various income streams and different income sources, and we want to identify the income streams for your business. Most people are interested in creating what's called passive income, which is where you make money in your sleep. And that might sound really.
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But nobody gets to make money in their sleep without doing a little leg work first. So in order to create passive income, we have to identify the way you make income now and see if it can be streamlined or if you can go from a one to one model to A1 to many model and therefore increase that income stream.
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If you want to create passive income, you got to have your income categories really dialed in on your bookkeeping first.
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And then finally, we do this so that you can identify your profit margins easily the way that I set up someone's bookkeeping is to reflect the income categories in their cost of goods categories, your cost of goods are the things that you have to buy in order to sell products or provide services.
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To your clients and customers. So your income categories, your income streams are going to reflect.
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What you bought in order to create that revenue, what you bought in order to sell a product to your customers, so your income categories and your cost of goods are going to be reflective of each other and in that way we can identify a profit margin, a profit margin is what's left over.
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In your revenue, when you take into account what you had to buy.
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In order to create that revenue, so your cost of goods, the margin is the difference between the revenue and the cost to create that revenue. So your profit margins are going to be identified by setting up your income categories correctly. So let's now talk about how you're going to identify.
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Income.
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And when to create subcategories because you might want to do that number one, we need to identify what your various products or offers are. Even when you are working with a business coach or a strategist or a marketing firm.
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They're going to ask you this question too, but your bookkeeper should be asking you this question. What are your offers? Because I need to know if any of your offers belong in the same income category, or if they need to have separate income category.
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One of the examples I like to use for this is if you were to imagine a lifestyle kind of brand and that brand had a store that sold clothing as well as HomeGoods. So maybe they sell workout or active wear and then they also sell candles.
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And maybe ****** wall art that has just words on it that you hang up on your wall. That business would probably want to see the difference in revenue from the clothing that it sells versus the home.
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Goods that it.
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Cells and so even though you've got many different products in each of those categories, you know they don't just sell one article of clothing, they sell that article of clothing and all the different sizes and colors. And then there's many other articles of clothing that they sell. But all of that's going to go under the category.
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Of clothing.
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Versus the HomeGoods, which is art and candles and maybe throw pillows and blankets. All of that is HomeGoods, but we don't need to see every single product that you sell on your profit and loss statement, which is why we scoop everything up into an income category and then you're going to want to look at.
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Are these stand alone or a one time offer?
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Is this subscription based where someone pays regularly to get a product or to receive a service or access to something? Or is it a time limited payment plan? So if you purchase a coaching package that lasts for 12 months, does that client or customer pay you?
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Once for that package, do they go on a payment plan? Do they pay ongoing for that package until they decide to cancel their Subs?
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These are the questions that you're going to ask yourself about each one of your income categories, your products and your offers. And I also want you to think about seasonality now for some businesses. Seasonality does not apply. For instance, I'm a bookkeeper. I don't do tax returns, but when I did work somewhere.
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What we did tax returns for people and for businesses.
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You'd see a little bit of a bump in revenue from March through about May or June each year. That is because that's tax filing season. There was a seasonality to at least one of the offers now most accountants due tax returns all year long. There is always a tax return to.
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Even if people have missed their deadline, but that is a seasonal offer versus bookkeeping that gets done every single month, and most people pay for bookkeeping services on a monthly basis. Now, if you are one of my monthly bookkeeping clients, you also have the option to pay for your bookkeeping for six months at a time.
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And I give you a little bonus when you do that, you get 2 free consultations with me every single year to strategize, to set goals, to plan, to review your bookkeeping together, to prepare for taxes. So my clients that pay on a six month plan get those two.
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Free consultations as a little bit of a bonus. Thank you.
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So my six month clients are kind of seasonal, they only pay me twice a year and my monthly bookkeeping clients to just pay every month. That's not seasonal because we do services all year long. I'm always doing bookkeeping for people.
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So that would be kind of our perpetual subscription based offer even though.
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I don't call.
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It a subscription, I call it a monthly engagement. It doesn't matter. That's what it boils down to. If you have somebody that's paying you on a subscription basis for maybe a package where there is a limited amount of time.
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For that offer, you know, the six or 12 month program that you buy into?
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It might be a limited time subscription, so you may have monthly revenue coming in from people that have signed up for that subscription, but they're only going to be paying you for 12 months, after which you won't have that subscription revenue from that particular client or set of clients. And then.
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Also, we've had a huge boom in e-commerce, especially after 2020, and the pandemic. We had a lot of businesses that had to shift to selling things virtually. We had restaurants that were closed down by stay at home order.
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Meaning that they could not sell food. They couldn't even do curbside pickup for an amount of time, and they sold gift cards. They sold merchandise during that time so that they could have revenue even when they couldn't sell food. And that was a way for a lot of people to support their local small businesses.
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Go buy a gift card and go buy some merch online. And when you've got an in person business.
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These are brick and mortar based business that shifts to either also including e-commerce or shifts completely to e-commerce, that changes what happens with those income categories. If I have a business that is solely e-commerce, then I'm not worried about breaking down their income.
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Categories and their offers into e-commerce versus retail sales, but if I have a business that is a retail brick and mortar physical location and they also sell products on line through e-commerce platforms.
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Then I actually separate those income categories out because it's very useful for my clients to see if they spend, you know, an ad budget for their e-commerce sales versus if they run an ad in a local magazine to get more people coming in the door to their physical location.
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Maybe they held a door Buster sail at the physical location and when we've separated e-commerce versus physical location in person retail.
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Then we can see the.
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Effects of those advertising efforts or the effect of any campaigns that they have run to boost the sales in either the e-commerce platform or in person. So that is the way that I would look at your individual offers, whether they're subscription, whether they're standalone or one off offers are they.
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Time limited and breakdown those categories in that way, but I just want to reiterate that every product that you sell or every offer that you have doesn't necessarily need to have its own income category. Now let's talk about subcategories because.
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Like I said, not every product needs its own income category. Neither does a product need its own subcategory. I recommend at a maximum having three main income categories in your business. If you can't fit like with like, and you can't.
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Whittle it down and narrow it down to three income categories. Come talk to me or you can go with whatever you want. You can have as many income categories as you want, but I don't think it's useful to have more than three. I think if we keep it to limit, limited to that that most businesses can do that.
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But within those three main income categories, you can have I recommend up to two subcategories with the example of a clothing slash HomeGoods store where you have e-commerce sales as well as physical location sales, I would probably set up the main income.
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Categories to be e-commerce sales versus retail sales.
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And then the subcategories for each of those would be clothing and HomeGoods.
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Because I want to know who came into the store, how much we sold on clothing in the store versus HomeGoods in the store. And then I want my client to see e-commerce side clothing versus HomeGoods sales. So that is how I would break it down. Again, this is all personal preference. None of this really matters.
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That much except.
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That you deserve to see your data in a way that makes sense and is informative to you, because this is the data you're going to look at when you decide to run an ad campaign or you decide e-commerce just isn't ******* worth it because we can't seem to make any sales no matter how many ads we run, no matter how many coupons.
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You give.
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That is the information that you're going to look at in order to make those choices. So break your things down into income categories, and then if you need to do subcategories, if it makes sense. And again, we're grouping like with like. So whatever makes sense for you to stick together into an income.
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Category do that for my.
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Business I have an income category called accounting Services because whenever I'm doing the accounting for somebody, the revenue from that goes into that category versus my income category for consulting. This is where I'm doing consulting for other people. But the fees that people pay me to train them.
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How to do their bookkeeping to the to train them on QuickBooks Online?
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That goes in the consulting fees category and now I do have digital products as well digital courses, workbooks, downloads, webinars, things like that. That is my third income category.
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As of 20.
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24 It's brand new, but I do have digital courses so I created that separate.
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I worry to see how much I sell in digital courses versus how much I bring in from actually doing accounting for other people, for actually consulting and training other people how to do their bookkeeping. So if you know which income streams you want to see broken down on your.
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You know, and you know the details that you want to see. Then put those into your income categories. And another thing, I recommend that you use the language that you use day-to-day in your business when you're talking to people about your business use that same language and reflect it in your P&L, in your chart of accounts.
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So accounting and consulting and digital core sales would not make sense for our restaurant, for their income categories, right.
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For a restaurant, it would probably be food sales, alcohol sales, merchandise sales, Togo orders, third party delivery, app sales. Those categories that language makes sense for a restaurant and not for my bookkeeping business. So use the language that you already use to describe.
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How you make?
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And put that into your income categories. That will make reading your reports much more relatable and friendlier. You will actually know what you're looking at and be able to understand your numbers when you've used the language that you use day-to-day in your business. By the way, if you have.
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A bookkeeping or tax or self-employment topic that you want me to talk about. I would love for you to leave me a comment which I believe you can do that on Spotify. I don't know if you.
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Can do it on Apple podcast.
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And be in the community for as long as you want. You can cancel it anytime. I can't wait to see you in there. And thank you so much for listening to this episode. Please leave me a rating or review that helps this podcast reach other business owners that need help with their finances. And I'll talk to you all next week.