Reading your P&L Statement
improves your profit margin
Most Small Business Owners don’t take advantage to learn what information their P&L statement provides. Why? Small Business Owners (SBOs) don’t know the value it offers them when making decisions, how to analyze it to improve business performance, or how it is created.
When a SBO understands the different insights reviewing a P&L Statement provides, better decisions are made throughout the year to favorably impact business. Unfortunately, by not reviewing financials often enough, most SBOs are left at a competitive disadvantage.
What Is a P&L Statement?
It’s a financial statement which reveals what your Profit and Loss is for any certain time frame you select to review. It reveals your total revenue (top line) and total expenses, as well as your net income (bottom line).
Other financial considerations need to be addressed in order to get down to your business’s net income. There are different ways to break down expenditures (expenses), which includes Operating Expenses (rent, utilities, etc.), Cost of Goods Sold (COGs), Owner’s Draw (your salary), Stockholder Payouts, and other categories.
P&L Statements can be created for a said period of time. Most SBOs only utilize this statement as reflective instead of in real-time or slightly delayed real-time.
How I Stopped Unnecessary Purchases
This is how I used my P&L statement to minimize expenditures last year. There were several months where I found some really great apps for business development. One led me to another, and another. Before I knew it, I had made over 15 unnecessary purchases.
Each purchase was inexpensive unto itself. Only 3 were really necessary, while the rest were cool and I would use over time.
NOTE: I didn’t notice the unusual amount of expenses during my monthly review, but I sure did while reviewing my Quarterly P&L Statement. When I further investigated the expenses, I noticed why my bottom line wasn’t where I wanted it to be.
I caught this trend and took corrective action before it negatively impacted the next quarter or the whole year. This is the benefit of working your financials in realtime instead of reflective – when you can’t do anything to change your business’s bottom line.
Why Analyzing P&L Statements Matters
Before you can analyze P&Ls, you must have a formal and automated accounting or bookkeeping system. Why? Once you have your accounting software created the way you need it for your type of business, everything is easily accessible.
I strongly encourage you to find a tenured bookkeeper or CPA to develop your system. They add value in strategizing with you how you want different aspects of income and expenses organized to suit your type of business. Additionally, accounting professionals know what will serve you best depending on which type of business entity you are filed as with your state and/or federal government.
Yes, all these details can make a big difference. I can’t tell you how many SBOs come to me saying they own huge sums of taxes and don’t have the money to pay it. Why? They didn’t either file their business entity correctly or they didn’t keep appropriate books.
This is an area of business where you either take the money to invest upfront to do it correctly or you’ll probably pay for the mistake later. FYI: There’s usually a bigger price tag attached to the latter option.
Once you have your accounting system set up, you can easily create a P&L Statement for the month or quarter to view trends. I strongly encourage you to do both until you are accustomed to what your average monthly numbers are and can easily notice patterns.
P&L Statement Tip
Beware! A quarterly statement may better reveal significant changes than a monthly statement. Changes may not be as evident from month to month. This is similar to the frog being incrementally cooked in a boiling pot of water versus putting a frog directly into boiling water. If something looks unusual, I always do a monthly and quarterly to see my trends.
Good news! Once you are using your business’s P&L Statement, you’ll be able to compare other months, quarters, or years to identify trends and make adjustments. You’ll be swiftly responding to create a more favorable bottom line! This tool is great to help you create a better competitive advantage to support your business’s success rate.
Feel free to ask any questions or make comments regarding your business’s accounting strategy.
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