Susan’s clothing store has been booming lately since sales are up! Down the block, her chiropractor neighbor has a line out the door just for appointment signups. But are these looks deceiving? Is business doing well? It’s hard to tell how well a business is doing solely from sales, but your profit and loss may give you a more complete snapshot of how it’s doing overall. P&L statements are reports that tell you how much money you made and how much money you spent in your business
Understanding and properly maintaining proper record keeping and accounting processes allows you to 1) generate a profit and loss statement and 2) ensure that the numbers on the report are correct and accurate.
Let’s walk through some of the ways you can better understand and maintain profit and loss in your business.
Must-know profit and loss terms to impress your accountant
Just like you need to learn to put on your shoe before you run, you’ll need to be able to read your P&L statements before you can properly maintain P&L.
Here are the definitions of some terms you may find on your profit and loss statement:
Remember all those chiropractic sessions you gave clients or the trendy clothes you’ve been selling year-round? It paid off; the revenue of your company is any money you make from selling products or providing services.
Cost of Goods Sold (COGS) or Cost of Sales
As you know, those chiropractic sessions given and clothes sold didn’t come out of thin air. Before you start counting money generated from those sales as profit, you need to consider the money spent on what was required to use to get revenue (cost of materials, labor costs, shipping costs, etc.).
Gross profit is the profit made after deducting costs associated with making and selling your clothes (materials, credit card fees) or the costs associated with providing the chiropractic sessions (direct labor, masseuse commission). It is calculated by subtracting cost of goods sold/cost of sales from your revenue.
Operating Expense (OPEX)
Regardless of whether you sold clothes or had a chiropractic appointment, you still have fixed costs, such as operating expenses. This will include rent, insurance, employee salaries, and other overhead costs.
The most important number on the profit and loss, or the “bottom line.” This number is calculated by subtracting all expenses from your total revenue; this will decide whether you have a profit 😊 or a loss ☹
P&L won’t maintain itself – at least not well
Properly maintaining your profits and losses allows you to determine your business’s profitability or any changes you need in your business to continue smoothly swimming. If you don’t maintain your profits and losses correctly, you will overlook expenses, which leads to an excess amount of debt or even small business bankruptcy. Here are three ways you can better manage P&L:
- Keep detailed records of your business’s expenses and sales! Not only will it give you the piece of mind you deserve, but it will also make for more accurate P&L statements.
- Maintain a consistent bookkeeping schedule, whether it’s monthly, quarterly, or yearly. However, the more frequent your bookkeeping is, the more accurate and insightful your P&L statements will be (and fewer headaches).
- Regularly meet with an accountant (or accounting company). Accountants can help find areas to slash expenses and manage some of the aspects of your money you may not be considering. At the end of the day, they’re also there to help with any decision-making needed; after all, two brains are better than one!
Think bigger to become a more insightful CEO
Now that you’ve placed the P&L statement terms on colorful sticky notes and written down all these P&L maintenance tips, you’re probably wondering if there’s any other advice you may want to know.
Try going further than generating a general P&L statement. Try running and developing reports by department or project. This is an advanced trick CFOs use to get an overall understanding of how certain activities impact the businesses as a whole. If you’re already comfortable creating one statement, the sky is the limit – nothing can stop you from trying different statement variations!
If you’re experiencing medium to large losses or small profits, you will need to find ways to generate more sales, whether it’s through strategic pricing (discounts) or changing your marketing strategy. If you’re realizing there’s money being unnecessarily spent, then this is also a good time to find ways to cut back on some expenses or develop a budget for your company.
Remember: P&L statements are progress reports waiting to be improved
At the end of the day, your clothing store or chiropractic clinic should treat P&L statements as progress reports; while it may give you insights on your business’ financial health, it’s not a direct/final indication of it.
In conclusion, these reports can help you identify areas of your business which you can improve or potentially reveal unnecessary costs. If you go more in-depth in your P&L statement, you might be able to create a forecast of what you can expect in the future or become enticed to add formulas to test certain assumptions about your sales or expenses.
What insight were you able to gain from your most recent profit and loss statement?
Still having trouble reading and understanding your profit and loss statements? End-of-the-year financials have you scrambling around?
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