What is your Profit & Loss Statement Good for Anyway?

Being involved with small business for the last 30 years, it has come to my attention that many of you could use some help in understanding how to use your Profit & Loss effectively in managing your business. Some of you may not even know that this is a tool to use in managing your business. So we are going to discuss just exactly what the Profit & Loss Statement is good for anyway.

 The Profit & Loss Statement is your major management tool. This report shows you many things that you will want to be aware of as you are managing from month to month.

 The Profit & Loss lists all your income and all your expenses. It will first list your income and then list your Cost of Goods Sold (COGS), subtracting the total COGS from your total Income. COGS are the expenses that are directly related to your service or product you sell. For example, if you are a contractor, then your COGS could be your labor, the building materials, the permit, things like that. Each industry has its own COGS. So the number that you get from subtracting your COGS from your total income is your gross profit margin.  This number is very important and helps you to determine if you are making a profit on your services or product.  This is not the infamous "bottom line" though, because all companies have "overhead" or expenses that are not directly related to the service or product. For example, your accounting, the receptionist, taxes, office supplies, and many other expenses not directly related to what you do or sell. So after you have subtracted the COGS and the overhead expenses from your income, that is what your net profit is for the month or the infamous "bottom line."

 There are many things to be aware of and to look for on your Profit & Loss in helping you to manage your company. The following is a Top Ten list:

1. Did I make a profit? If so how much? What percentage of my income was my gross profit and what percentage of my income was my net margin (after COGS and overhead expenses are subtracted).  Some small business owners do not review their Profit & Loss and just go by their gut on how their company is doing. I cannot emphasize enough how important it is to go by the numbers here, rather than your gut. Numbers do not lie. If your gut is wrong, you can end up making some very serious mistakes and possibly cost the life of your company.
2. Use your Profit & Loss to determine your financial viability, not your online bank balance. Sometimes small business owners think that if they have money in the bank, they are good. The problem is that your bank account is only one facet of your business at a specific point in time, and your Profit & Loss will provide you with the overall picture. It will let you know if you made a profit, which does affect your bank balance or cash flow. With the Profit & Loss you will be able to tell what your future needs. With a bank balance, all you know is that moment and that balance may not represent everything that you have spent, as in checks that have not cleared. So your bank balance is not your best indicator to use in order to manage your company effectively. It is a snapshot of a moment in time that does not tell you where your company is at.
3. If I did not make a profit, why? Am I bidding at a proper rate and enough? Did things go sideways on jobs and so management needs to be honed in, in order to get my gross profit margin up? Maybe I am taking non profitable jobs just to keep my crew busy and it is costing me too much money. Maybe, I need to increase the cost of my product that I sell? Maybe I need to increase my rates?
4. Spent too much? Did we spend too much on a given expense, like tools? Computer repairs? Cell phone fees? Meals out? Advertising? You can check each expense item and see what you spent that month on it, and then determine where you can cut back. What are you spending your money on? What can you cut back on? What can you cut out?  You can see this at a glance as a total for each expense category on your Profit & Loss.
5. How much income do I need to break even? You can use your Profit & Loss to determine how much income you need in order to break even. This is sometimes the best we can do, and that is better then a loss, so this is a critical bit of information to know. (See future article on how to determine your breakeven numbers and to run the "What If's" in order to be prepared for any situation.)
6. How many months have I lost money? If your company runs on a cash basis, then you will feel the effect of loosing money on your cash flow almost immediately, or at least within that month. If you run your business on an accrual basis (which most do), then it takes a little longer to feel it, sometimes up to 2-3 months. This is when you can use your Profit & Loss to prepare yourself and deal with any issues before they happen, because you will see it in your Profit & Loss. So for example, if you had a loss in April, then you can look at your Profit & Loss and do some cut backs immediately on overhead expenses and hone up your management to hopefully either breakeven or make a profit in May, then the loss of April will not be so hard hitting. If you do not look at your Profit & Loss and make yourself aware, then when the loss in April hits you and you have a loss in May and didn't know it, you are in a crisis/panic situation and trying to play catch up, not knowing why or how you ended up in this situation.
7. Based on your numbers, you will be able to tell if you need to get a loan.
8. Do you need to lay people off? You can determine this from this Statement.
9. Do you need to make your company more efficient in order to break even or make a profit?
10. Based on your income numbers, you might find one income source essentially non-existent and another is booming. This will give you direction on what to promote, what to put your money into and what not to.

 So as you can see, you can use your Profit & Loss to help with many facets of the business. But as you may have figured already, it is very essential that your accounting/bookkeeping be accurate, because if the accounting is off, then these reports are incorrect and therefore, worthless. So if you have QuickBooks and do not know accounting, it would be good to outsource the review of your books and maybe the entry of your transactions to a reliable accounting/bookkeeping service, so that you can have effective tools in your tool bag and have control of your business.

 So as you can see, your Profit & Loss will provide you with crucial info in the management and direction of your company.  Understanding what to look for and how to use it, can save your company in tough times and make your company extremely profitable in the good times.