What Should a Service Business Track Every Month?
A service business should review more than the balance in its checking account.
At a minimum, business owners should track revenue, gross profit, operating expenses, net profit, cash flow, accounts receivable, debt balances, and job or service profitability each month.
These numbers help answer a much more important question than “How busy are we?”
They help answer:
Is the business actually making money?
1. Revenue
Revenue tells you how much the business earned from customers during a particular period.
Every month, compare revenue to:
The previous month
The same period last year
Your budget or sales goal
Individual services or revenue categories, when useful
Revenue growth is important, but revenue by itself does not tell you whether the business is becoming more profitable.
2. Gross Profit
Gross profit is generally the amount remaining after direct costs associated with providing your services are subtracted from revenue.
Depending on the type of service business, direct costs might include:
Direct labor
Subcontractors
Materials
Job supplies
Certain equipment or service-related costs
A company can increase revenue while its margins decline.
That's why gross profit deserves attention alongside sales.
3. Operating Expenses
Operating expenses are the costs of running the business that are not directly tied to one particular job.
Common examples include:
Office payroll
Insurance
Advertising
Software
Vehicle expenses
Rent
Telephone and internet
Professional services
Merchant processing fees
Reviewing these expenses every month can help you identify costs that are gradually increasing.
4. Net Profit
Net profit shows what remains after the business's expenses are accounted for.
It is one of the most important numbers a business owner should understand.
Your checking account balance is not the same thing as profit.
The amount of cash in the bank can be affected by:
Loans
Credit card purchases
Owner contributions
Owner withdrawals
Equipment purchases
Debt payments
Outstanding customer invoices
Your Profit & Loss statement provides a clearer picture of the company's operating performance.
5. Cash Flow
A business can show a profit and still struggle to pay its bills.
That is why cash flow should be monitored separately from profitability.
Consider:
Cash received from customers
Payroll
Operating expenses
Loan payments
Credit card payments
Taxes
Equipment purchases
Large upcoming expenses
The goal is to understand not only how much money the company earns but when cash actually enters and leaves the business.
6. Accounts Receivable
If you invoice customers, review accounts receivable regularly.
You should know:
How much do customers owe us?
And:
How long have those invoices been unpaid?
An accounts receivable aging report commonly separates unpaid invoices by age.
For example:
Current
1–30 days overdue
31–60 days overdue
61–90 days overdue
More than 90 days overdue
Growing sales do not help cash flow very much if customers are not paying.
7. Debt and Credit Card Balances
Business owners should also know how much the company owes.
Review:
Credit cards
Lines of credit
Equipment loans
Vehicle loans
Business loans
Watch whether balances are increasing or decreasing.
It is also important to understand that a loan payment is not necessarily the same as an expense.
The principal portion normally reduces the loan balance, while interest is generally recorded as an expense.
8. Profitability by Job or Service
For businesses that can reasonably track it, job or service profitability can provide extremely useful information.
Ask:
Which jobs have the strongest margins?
Which services make the most money?
Which jobs regularly run over budget?
Are labor costs increasing?
Are materials reducing margins?
Are your busiest services actually profitable?
The service producing the most revenue is not always the service producing the most profit.
What Reports Should a Service Business Review Every Month?
For many small service businesses, four reports provide a strong starting point.
Profit & Loss Statement
Shows income, expenses, and profit for a specific period.
Balance Sheet
Shows the company's assets, liabilities, and equity at a particular point in time.
Accounts Receivable Aging
Shows which customers owe money and how long invoices have been outstanding.
Cash Flow Statement
Helps explain how cash moved into and out of the business.
Businesses tracking projects or jobs may also benefit from job profitability reports.
Your Monthly Bookkeeping Checklist
Before you consider the month's bookkeeping complete, confirm that:
Bank accounts have been reconciled
Credit cards have been reconciled
Transactions are properly categorized
Accounts receivable has been reviewed
Loan balances appear reasonable
The Profit & Loss has been reviewed
The Balance Sheet has been reviewed
Significant changes have been investigated
The reports actually make sense
The Bottom Line
You do not need to spend hours studying accounting reports every month.
But you should be able to answer:
How much did we make?
Where did the money go?
What do customers owe us?
What do we owe?
Which work is profitable?
Are expenses increasing?
Are we actually making money?
If your bookkeeping cannot reliably answer those questions, it may be time to improve the system behind it.
Monthly Bookkeeping for East Texas Service Businesses
ETX Bookkeeper provides QuickBooks Online bookkeeping for service businesses and small businesses throughout East Texas.
Monthly bookkeeping includes transaction organization, bank and credit card reconciliations, and financial reporting to help keep your books current and easier to understand.