3 Things you should look for in your Profit and Loss (P&L) Statement

The profit and loss, or P&L for short, will highlight the profitability, the effectiveness of your decisions, and how you’re spending your money, overall it shows the success of your business.

The P&L summarises all your Sales/Revenue and expenses accounts. If you’ve spent more than you’ve sold then you’ll show a loss, however if you’ve spent less than what you’ve sold, then you will show a profit. Stating the obvious, you want to show a profit where possible.

The P&L report can give you so much information if you only look for it. The top three things I suggest you start focusing on within your P&L report. This is definitely not all the important things that the P&L can tell you, but it’s a start, especially if you’ve never looked at it before.

1. Understand where your money is being spent.

For most small businesses the P&L closely resembles how you’ve spent your cash. For this reason, it’s very important to stay close to how you’re spending your money, especially since most small businesses fail due to cash flow issues.

Each month have a scan over the spend categories you see in your P&L and make sure you understand why the balance is what it is. For example, if your “RENT” expense account shows 20,000 but you know your monthly rent is only 5,000, this needs investigation. It’s very important to reflect the expenses under the correct expense description so that the P&L remains meaningful.

2. Understand the effectiveness of your decision-making.

Once you have been in business for over a year, the P&L will show you the trend of spending year on year as well as month on month. Why is this relevant you ask, well because you can see if your spending is trending up or down. Have you brought on a new supplier you thought would save you money? If your revenue hasn’t moved much but your expenses have increased, you need to start questioning why, what’s changed, and more importantly what you can do to stop/change this pattern. Keeping an eye on your expenses allows you to act quickly when things aren’t looking as you expect, but if you never look, you will never see. It’s kind of like standing on train tracks with an oncoming train, but hoping that if you’re not looking it won’t hit you.

3. Supports Growth & Tracking Targets.

You may have started your business to create a multi-million-dollar empire, to replace your regular day job, or something in between. But We are all in business to grow or at the bare minimum maintain our existing sales revenue. Having regular reviews and understanding your P&L will help you do this by;

• Track your monthly revenue – is it trending up, flat, or reducing each month?

• What is the profitability of this sale, if you divide your margin into your revenue, you should see a consistent or increasing margin %. As the margin contains the cost of selling your product/service, it’s a direct reflection of how efficient you are at making the sale.

Above are some reasons you should clearly understand your P&L and review it each month. Having a clear understanding of your business performance is crucial and with the support of technology and some decent accounting software available, this should be one of the easiest and most enjoyable things on your to-do list. After all, being able to do more of what you enjoy is why you started your business in the first place right?

If you would like to get more support on the above or anything else, please get in touch.

0490 787 756

support@businessbasicssupport.com.au