When it comes to financials, it seems that there are two types of business owners: Those who know every number, where it came from, what it means, and what to do about it, and those who feel overwhelmed by the accountant jargon and sea of numbers and therefore choose to ignore it all. Although it may feel easier to be the kind of business owner who isn’t in touch with their financials, it is actually detrimental to your success and could keep you from making the kind of money you deserve.
A profit and loss statement, balance sheet, and cash flow statement are all important financial statements for business owners. Credibly breaks down what each one means and how you can use them to make better decisions for your small business.
What is Profit & Loss?
Profit and loss is a summary of the revenue, costs, and expenses incurred by a business during a specific time period. Profit is the money made by the business after subtracting expenses from revenue and sales and can be measured through how much money is made off of each product or service transaction and the quantity of what is sold. Losses refer to any money the business has to spend, which can include the cost of goods sold, general administrative expenses, research and development expenses, interest payments, and any other operating expense that may come up in your business.
What is the P&L Statement?
I know what you’re thinking — yeah, it shows profits and losses, right? Yes, however, it can offer far more insight than that. A P&L Statement contains specific categories of sales and expenses, including net sales, cost of goods sold, gross margin, selling and administrative expenses (operating expenses), and net profit.
Truly understanding your P&L statement will show you what course corrections you can make to grow your P and shrink your L. Here are the key things I stay in touch with on a P&L that will tell you all you need to know about the state of your business.
Ever wonder why revenue is also referred to as the “top line”? That’s because it’s the first thing on a P&L, and it’s all the money you’ve brought in during the time period for your product or service. This does not include loans or cash infusions, only earnings collected for the service provided. Why is this important? Once you get to know your revenues on a regular basis you will immediately be able to know if you’re up or down. Up means good — keep on improving what you’re improving — and down means bad, so look for what you’re not improving and bump up your marketing budget if necessary.
2. Cost of Goods Sold
This is in the expense section of your P&L and is the controllable cost of what it takes to deliver your service to the marketplace. Most commonly this is the cost of goods and the labor associated with it. In our business, we like to look at this as a percentage and shoot for 55%. If we see a month where the cost of goods sky-rocketed, we know we have to look at our vendor invoices and find out what prices went up and negotiate them back down quickly — often getting retroactive credits for the unannounced increases.
3. Gross Profit
This line is my favorite, as it tells you if your core business is profitable or not. If it’s a positive number, you’re doing well and can keep growing. If it’s negative, it’s time to go into triage mode and figure out what’s going on. Your business can still be losing money even if this number is positive because there are all those other expenses that haven’t been accounted for yet, like utilities, lease payments, and taxes, but this number will tell you if your core concept is sound.
P&L Statement: What You Need to Know
Whether you’re a seasoned vet in the business world or just starting out, your P&L statement can give you a great snapshot of the health of your business and help you make your decisions with more calculated certainty. A profit and loss statement is essential in helping business owners keep track of how their business is doing financially and specific areas of the business that can be improved.
Once you get some time under your belt you’ll even start looking forward to seeing them and watching the trends in the numbers. Profits and losses are fundamental to your business’s success — so take control of them.