Closing the Books in Accounting
It's time to close the books out for your business
It’s that time of the year again, where several businesses and organizations are closing out their books. What does closing out the books mean? Closing the “books” in accounting is a common accounting phrase that has historically been used among accountants who prepare their year-end financial statements (ie: income statements [a.k.a. profit & loss statements], balance sheets, cash flow statements, and shareholders’ equity statements). Each of these statements tells a different financial story of the business and offers multiple perspectives about how to understand and analyze the financial health of a business.
How to Look Over Profit and Loss Statements
For many businesses, they live and die off of the income statements. Depending on the specific business or organization and what their business model is, the income statement provides valuable insight into how much revenue and income the business earned during that given year, as well as all the expenses. In its simplest form, when you deduct all of your expenses from the revenue, that’s when you arrive at your Net Income.
When net income is positive, a business is to report a profit at the end of the year, and they’d be considered, “in the green,” for that year. When the business’s net income is negative, essentially the business reports a loss at the end of the year, and it would then be considered, “in the red,” for that year.
When your business is in the green and reports a profit at the end of the year, it’s normally considered to have been a great year. Usually what comes next are discussions for the following year's budget plans and how to re-allocate the profit to shareholders, investors, and other partners. This is a process that is normally unique to that specific business, organization, or corporation. For example, some folks like Jeff Bezos take profits earned at Amazon and acquired businesses, such as Whole Foods. Regardless if you’re in the green, or red, reviewing costs and budgets in a forecast model regularly happens immediately after the books are closed, so decisions about costs can be made early-on, in an effort to reduce expenses for the following year.
When your business is in the red and reports a loss at the end of the year, it may not have been your best year, and you can learn a lot about your business while you close out the books. You have an opportunity to relive the entire year, month-to-month, and evaluate the purchasing decisions made for the year that’s being closed out.
The Rising Costs of Utilities in 2021
When reviewing all purchasing decisions and expenses, it’s very common to analyze each line item and assess the cost, to see if there are any areas to save money. One of the line items that may or may not get the most attention, are the utilities. Especially if your business has a location in a deregulated energy market, your utility costs in 2021 may have been higher than they were in the prior year.
Why were utility prices higher in 2021? There are several reasons
(ie: Texas storms, extended summer weather and hot temperatures, Hurricane Ida, and LNG exports to name a few) why utility rates increased in 2021, but if your businesses are not in deregulated energy states, then you probably didn’t feel the impact, as much. If you’re in a deregulated energy state like Illinois, Ohio, Texas, Maryland, New Jersey, New York, Pennsylvania, or Connecticut, your utility cost may have increased in 2021 if your electricity rates and/or natural gas rates were or still are on a default variable market. Electricity, natural gas, and water can amount to a very high line item under utility expenses, when you’re closing out the books at the end of the year. What steps are you and your organization taking in 2022 to reduce your utilities, by reducing your energy overhead?
For businesses in deregulated energy states, electricity and natural gas can almost be managed like an asset. For more information on different types of energy rates and plans, and how your business can reduce your energy overhead for 2022, please visit our website, goananta.com, or contact us at
info@goananta.com
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