Do You Know What a Profit & Loss Statement Is? You Need To!
Guest Blogger, Jessica Reagan Salzman
We live in an age when it's easier than ever to enter data and create a financial report. There's a wealth of information at your fingertips as a small business owner. But as I'm sure you know, understanding what is in those reports isn't as simple as clicking a few options in QuickBooks. Far too many entrepreneurs collect reports, like a profit and loss statement, and aren't sure what they are looking at. In order to put that information to good use, you need to understand the reason and the logic behind those reports.
And in many cases you may need to have a feeling of safety and security when you connect with the numbers side of your business. So it's sometimes helpful to reassure yourself before reviewing your financial figures that regardless of what the report you're reading reveals, you are always of great value and your numbers are simply an indicator of the financial position of your company at a given moment in time. The numbers aren't meant to make or break you, they are simply a way for you to be informed and empowered regarding the next best move in your business.
Here are five keys to getting clear on your profit and loss statement.
1. A profit and loss statement (also commonly called the P&L) is one of the most valuable and informative reports for your business. It answers the question "How much money am I making, if any?" It gives you a bird's eye view of how much money you are making in relation to how much money you are spending to make that money.
2. Viewing sales as if they are the profits of the business is a common mistake for new entrepreneurs, and a profit and loss statement can help correct that common misconception. If a business owner is seeing $1,000 in sales, they may incorrectly assume that they have made $1,000. However, they aren't accounting for the $20 website hosting, $20 email marketing subscription, $250 in small business coaching, and $125 in advertising that it took to make that $1,000. The actual profits generated by those sales are $1,000 minus $415, or $585 in profit (before income taxes).
3. A profit and loss statement will include a few major categories of information – your sales, the cost of sales or cost of goods sold, indirect expenses, and in some cases it will also include other revenue and other expenses. Your sales totals are going to come from the incoming money you've brought into the business through deposits, and the other information can be obtained from receipts, business bank statements, credit card statements, PayPal activity, and other financial documents. Be sure to gather everything together as you create your report so you can be sure your information is accurate.
4. A profit and loss statement can help you categorize expenses. Not all business expenses are created equally! When you create your profit and loss statement, you'll begin to see expenses fall into one of three categories. Variable expenses are directly affected by sales. If you sell physical products, this cost is tied to the number of units that you sell and is listed as "Cost of Goods Sold" on your profit and loss statement. Fixed expenses are constant expenses – things like your office phone bill, postage, business insurance, etc. Discretionary expenses are under your control – you can opt to have them or not (like business coaching, resources, traveling, etc).
5. For best results, focus on a specific period of time. Most profit and loss statements are for a few months or an entire year, but it can also be helpful to look at profit and loss statements each quarter, and ideally each month, especially if you've had a lot of changes to your expenses or income. This report can be used any time of year for general bookkeeping and taking stock of how far you've come. Using a profit and loss statement, you can analyze your businesses' performance and plan ahead for the future.
If you've been dreading the profit and loss statement, don't worry! Knowledge is power and the more you know about what is truly going on in your business, the better off you'll be. Facing the facts could be the exact step you need to take to get to the next level in your business. Without the insight into your business's numbers that the P&L provides, you are driving blind and lack the power to really make a difference in the future of your company.
Do you need help getting ideal clients and making more money with less effort and more fun? Schedule a complimentary MMM Strategy Session with me to identify which of the three keys of creating a successful business you are missing–Marketing, Mindset or Manifesting principles–and IMMEDIATE steps to take so you can get more clients and make a difference in more lives!
Your partner in success,
Marketing, Mindset & Manifesting Coach