A Short Guide to Profit and Loss Management for Small Businesses
Is there any business in the world that didn’t face the loss? The answer is simple: none. There are several factors that affect the profit and loss of any business. But it is upon the businesses to take care of the profit and loss management to grow and be successful. A business, be it small or large, does not only maintain operations or manufacture products, but they also have to take care of the financial condition.
Business is always associated with profits and losses. The key is to ensure that profits and losses are managed in a clever way to help businesses stay afloat.
But how does a business measure its success?
Is it customer satisfaction or employee happiness or a great sale? For each business, the factors will vary drastically. However, profit and loss is the most common factor through which a business can measure its success rate.
What Are Profit And Losses?
It’s always tempting to learn how well or poorly a business is doing. When someone wants to know how their business is doing, the first thing you check is your Gross Revenue (the total amount made from sales of goods and services).
But with the help of a profit and loss statement, you can clearly measure profit/loss to your business expenses or any problems.
By tracking the gross revenue you can find adequate sources for profit and loss too. Tracking is also helpful to identify the gaps in business sayings and expenses. So, before your business can explode into a series of losses it can be avoided with the help of P&L Management.
Once the P&L management is taken off, you can make the right strategy for your business growth.
What Is Meant By Profit And Loss Statement?
To learn about the share of profits and losses, a profit and loss statement is required. It is also known as an income statement or P&L Statement.
It is one of the most basic financial documents that focus on your business’s financial condition. A P&L statement can be monthly, quarterly, or yearly based. It focuses on the direct and indirect costs that incur in a business.
If you are not as familiar with the concept of direct and indirect costs then let’s take a look at an example down below.
You might be the owner of a small gym or a fitness center. If you operate the business then you need certain equipment for strength training, cardio, muscle building and so on that will help your client achieve the desired results. Each pair of equipment you buy (like a punching bag, weights, axles, etc) will be added to your direct costs.
Income Statement vs. P&L Statement
P&L statements are also referred to as “income statements.” The majority of the time, businesses who request an income statement or P&L statement are seeking the same information, which frequently includes your gross profit, net profit, operating costs, profit margin, and EBITDA. They want a glimpse of your company’s profit, in other words.
Although “income statement” may be a little more frequently used, the terms are generally interchangeable.
Use Of Profit And Loss Statement
All financial documents are invaluable. Accountants and Bookkeepers are responsible for managing the company’s profit and loss. Usually, the person handling the books is a CFO (Chief Financial Officer) who can either be an accountant or even the small business owner himself.
However, professionals must be hired to do the job. If it’s a large public company then they are required to release income statements. When you really want to understand the estimated results of P&L statements then you need to take care of the financial documents in the first place.
The P&L statement required dedication and work. so professional accountants need to put their effort into preparing the statements and be cautious about the profits more so than ever.
Components Of P&L Statement
If you have profit and loss experience then, reading a P&L statement is easy. It consists of the following sections;
The money earned by selling goods and services is called revenue. It is also the break-even point in the business that qualifies the mark for earning profits. If your break-even point is the same as the revenue then there is no profit in the business.
For the business to become successful the revenue must surplus the break-even point.
As mentioned above, these are the costs that the business has to make when making the product or providing the service to the clients. It is also known as the cost of goods sold (COGS).
To find out the gross margin, subtract the direct costs from the revenue. If your gross margin is high then it means your financial health is stable.
The costs that incur when running a business are known as the operating cost. It can be rent, administrative expenses, salaries, bonuses, outsourced hiring, etc.
The business earnings that incur before the depreciation, taxes, or interest rates. If you deduct operating expenses from the gross margin you can get the operating income.
The amount left after the expenses are deducted from the total revenue is your net profit.
The Importance of Monitoring Profit and Loss Statements
Monitoring your company’s profit and loss performance will be a regular exercise if you assess business success by profits, which is what the majority of small business owners do. Do you know whether your company is actually lucrative, in other words? Are you aware of the profitable goods and services and how your costs affect their profitability? Whether or whether you have money in the bank at the end of the month is only one aspect of profitability.
The comparison between reporting periods will show you whether you are improving and increasing profitability or are slowly tumbling downward, and it is just as crucial as the figures themselves. You need to monitor these figures each week and each month so that you could compare year over year, week over week, and month over month since, as humans, we often have a positive influence on the metrics we focus on the most.
P&L statements can provide you the opportunity to forecast or reproject your financial intentions. Utilizing financial statements provides a precise and transparent view of the business’s financial health. From this point, you can make decisions and closely monitor their outcomes to ascertain their effects on the company.
In challenging economic circumstances like the one we’re in right now, budgeting on a micro level is very crucial
How To Take Care Of Profit And Loss Management?
Now that you have a basic understanding of the profit and loss experience now we need to focus on managing it.
Imagine it this way: profit and loss management is taking control of the income. By managing the income, the incoming cash flow, and expenses, the outgoing cash flow, you can balance the earnings and profits.
It usually involves dealing with reports known as P&L reports. These reports are helpful in making you understand how well or poorly your business is doing. Making financial strategies becomes easier and more insightful.
Comparing the profits and losses is not a straightforward method. But with the help of profit and loss management, one can plan accordingly to the financial forecasts to improve the business performance.
Besides this, there are three basic things you can do to ensure profit and loss management;
Monitor The P&L Reports
Usually, the financial reports are generated weekly, monthly, quarterly, or annually (as discussed above).
An accountant can generate the report as needed/requested by the higher management. This may give the advantage to the accountants to take a look at the numbers in advance. The reports alone can help to make an informed decision about whether to spend the cash or wait for another investment and so on. The decision is in the favor of maximizing profits.
Monitoring The Cash Expenditure With P&L Reports
Regardless of the business size, cash inflows are important. It determines whether the business is going into profit or loss.
Once the profit and loss statement is prepared it gives you much insight into the sources that are generating more profit and vice versa. The P&L progress reports should be compared with the incurring expenditures i.e. the outgoing money/expenses. This way the business can manage the profits in a better way and prepare for future investments accordingly.
Outsourcing The P&L Management
There are consultancy firms that help small businesses to become consistent and improve their growth rate. My Count Solutions is one of the service providers that appoint accountants and tax consultants, bookkeepers, and CPAs to help such businesses.
Profit and loss management is a time taking process that needs consistent monitoring. So if a small business were to be partners with My Count Solutions they would be provided with a team of experts with experience in generating profit and loss statements.
Track and compare over time
With firms like My Count Solutions, you can enjoy observing improvement from week to week and quarter to quarter, but it truly gets fascinating (and valuable) when you can start comparing overtime on a weekly, monthly, and quarterly basis. You’ll be able to see your growth more clearly and make more calculated decisions regarding your spending or even borrowing.
Adjust according to your requirements
When data is used to guide decisions, you may more correctly estimate revenues, and your demand for cash flow, and modify your strategic plan rather than relying just on gut sense. When it comes to making decisions, Statistically, going with your gut is about as accurate as flipping a coin. Let the data guide your gut.
Managing your business finances is one of the important tasks that cannot be ignored if you do then be ready to suffer loss.
No matter how experienced you are as a business owner, none can be a substitute for the professional help of accountants and CPAs. Let My Count Solutions be your financial guiding partner. To learn more,