Mid-Year Money Review
It's hard to believe that we are halfway through 2022! I just can't believe that we are already there. Now is the time that we need to reflect over the first half of the year and really start to think about how your business is going. So if you really think about it, it's not just about your profit. It’s not only the numbers that I want you to think about but also the time. How is your time management going for the year? What is your stress level? You also have to take some time to look at your profit margin and your revenue.
Now is really the perfect time to conduct what I call a mid-year review because you have those six to seven months of data that should be recorded in your accounting system. It is not a great time to play catch up on the first half of the year, we're going to assume that that is already done and all your bookkeeping is up to date for the year! Now you can more accurately project the second half. Doing a mid-year review gives you the opportunity to evaluate some things within your business. So now's the time that you can see where you're at and go back to those goals that you set at the beginning of the year.
It's not too late, you still have months to turn your business around if it’s not going the way you really want it to go, or if it is going well you can still make some tweaks and minor adjustments to really, really accomplish the goals that you set out for yourself! Personally, I love love, love, love mid-year reviews, it's something that I'm incredibly passionate about. I know going over mid-year reviews with my bookkeeping clients is always really refreshing and really good to know what is going on in their business. They always have great takeaways from it and can really change their business trajectory for the rest of the year.
So I want to actually show you how to do your own mid-year review. If you don't have a bookkeeper yet, if you're not quite ready to outsource, I get it. But it's still important that you're staying on top of your books, and keeping up with your bookkeeping every single month, whether it's in QuickBooks, whether it's inside of our Calculated Tax Planner that we have available, whatever it is, it's still important to keep track of your bookkeeping and to do the mid-year review. I'm going to break this down for you with five easy steps for you!
1 - Revenue
Revenue is your income. It's not necessarily the deposits that come into your bank, that is a misconception. The first thing I'm talking about is your revenue. These are not loans that you've gotten, maybe money from a bank or you borrow money from Stripe. That money is coming into your bank account but that is not revenue, that is not income, and it needs to be counted correctly. Also, remember that we are talking about revenue when you are using that third-party software or third-party apps such as Stripe, or Square. Those particular services are charging you to use that service, right? It's a merchant service space. When you see the money hit your bank account, you're seeing the amount that your client or customer pays you minus that merchant service fee, you're seeing the difference. In reality, the income was actually what the client pays you so you got to do some manipulation with your bookkeeping to make sure that you're recording the correct amount of revenue.
For example, say your monthly service for your client is $500 and you use Stripe. Stripe charges you a merchant fee, I'm just going to say $10. So if you have $500 income minus $10, you're going to see a deposit in your bank account for $490. But that's not your accurate revenue, your accurate revenue is $500 minus the $10. So you have to actually put everything into your accounting system. The way that you would do that in this example is to make a recording of that deposit, and you can either change that deposit in your QuickBooks, or you can add what we call a journal entry to your books. So you would actually do a journal entry to increase your revenue by the number of Stripe fees and offset that revenue by the number of Stripe fees - it's like a double entry. Remember, bookkeeping is double entry. So that is the way that you do that. But step one is I want you to figure out what your revenue is and your revenue is income. So figure that number out! It needs to be done for the first six months, right? So we're going to look at the first six months I want you to come up with a figure for your revenue for the first six months of the year.
2 - Calculating Expenses
Remember, these are business expenses for your company. These do not include any payments on any equipment or vehicles. It does not include any loan payments either because those have to be inserted a little differently in your bookkeeping. With loans, your principal has to be recorded against the loan balance on your balance sheet, but the interest on that loan payment is an expense and that would be included in this number because you're calculating your expenses.
Another thing that is not considered an expense for your business is what you pay yourself. So if you're a sole proprietor or a single member LLC and you take funds out of your business bank account, whether you’re purchasing personal items for your business (FYI you should not be doing that in your business, read the blog on that here). Payments that you pay yourself are not considered a business expense. So I don't want you to add this into this step two number. Step two is only going to be business expenses for your taxes.
3 - Personal Contributions
Calculate what your personal contributions are to your business. And this may be zero, or there could be something here. A personal contribution to your business will be any money you deposited into your business checking account throughout the year. Maybe you had some money in your personal bank account and your business account was a little low one month and you had to put some of that money into your business again. That's what I'm talking about here. These are personal funds that you put into your business account.
4 - Calculate Your Pay
This one is a little tricky because I'm not just talking about what you took out of your business to pay yourself - so not transferred to your personal account. I'm also talking about anything that you may have taken out of the business for personal use. Okay, so that could be using your debit card at the grocery store because you forgot your personal card, that would be something that would be calculated in step four. Maybe you bought yourself a purse, or you bought something off of Amazon, those are not business expenses so they would not be in step two, but they are going to be in step four.
5 - Project 2022 Profit
This is super, super simple! All I want you to do is go back to step one and figure out what that revenue number was for the first six months of the year. Then I want you to get to step two, and figure out what that number is for your business for the first six months, right?
Revenue - Expenses = Profit
That simple equation is going to be your profit number for the first six months of the year. Then, I want you to take that number and I want you to divide it by six (to represent the first six months of 2022). That profit number divided by six is going to be your average monthly profit. Now I know that it can change. All months are variable; maybe you have more income on the back end of the year than you do on the front end, or maybe you have more income on the front end of the year than you do on the back end of the year. But you know those things about your business, and that’s also why it’s so important to have a bookkeeper or someone in your corner helping you with this process because there are many things to consider.
After you figure out what your average monthly profit is, you want to find your total profit for the year. To get that, simply take that monthly average profit and multiply it by 12. That is going to be your projected 2022 profits!
Now, I want you to take a minute and look at that number. Tell me how this number compared to your goals for 2022. And if you hadn't set any goals for 2022 It's not too late, now's a great time to go back to the drawing board and make some tweaks, make changes to really finish off the rest of the tax year strong. But there's another tip I have for you and this is a little added step.
Bonus Step
Take it one step further. Let's not just focus on profit. Yes, it's important, but I also want you to look at your cash flow, and here's how you can determine if your business has a good cash flow. Cash Flow actually equals money coming in versus money going out. So these numbers will include the loan, personal money that you put in, and personal money that you took out of your account. So go back and let's do some other numbers. I want you to look at your revenue, plus the loans or personal money that you put into the bank, minus your business expenses, minus your pay, and minus any payments that you made on any loans, and the equipment or vehicle - that's going to give you your cash flow. If this number is negative, that means that your business is actually taking out more money than is coming in and you have a cash flow issue in your business. If you do have a cash flow issue in your business, I look at that as there's some money leaks going on somewhere in your business, and it's time to really declutter some of the expenses coming out of your account.
So now really think about yourself and where you stand with your business. How is your mid-year review? What are some things that you can change for the last half of the year? Maybe it's that you need to bring in more money, so it's time to do more marketing and advertising to bring in clients. Or maybe it looks like your expenses are too high and you're realizing that you have way more subscriptions and you realize because of those free trials you forgot to cancel. Maybe you have too much payroll or your cost of goods is too high.
Those are things that you need to look at now to make those changes for the rest of the year. If you'd like to reach out, I’d be glad to help you with any of your bookkeeping or virtual CFO needs! If you're not quite ready for QuickBooks Online or outsourcing your bookkeeping make sure to check out the Calculated Tax Planner for the perfect in-between.
