Why you need to use your Profit & Loss
You input the bank account movements into your accounting software, but where does the data go? Do you ever review your profit and loss? How can you use this information to improve your business?
In my experience, business owners know what is going on in their business. They could tell you what products sell well, recent cost increases, or which salesperson is the best.
However- business owners rarely make time to review the financial reports that are easily generated from their accounting software. How do these details you “just know” about your business translate into profits (and cash!)?
As your business grows, you might not be the one doing all the work- ordering products, quoting for sales or paying the bills. So, it is understandable that while you know generally that business is going “good” or “bad”, you are not aware of the exact reasons or pick up the issues in time to correct.
Your accounting software simplifies the process of tracking income and expenses and provides an easy way to understand how your day-to-day operations impact the bottom line. Using the financial data that is in Profit and Loss Statement (P & L) is crucial to making informed decisions.
What is a Profit and Loss Statement?
A P&L statement is a financial report that summarises the income and expenses incurred during a specific period—usually a month, quarter or year. This report helps business owners assess their financial performance and profitability.
The basic equation for a P&L statement is: Income - Expenses = Profit (or Loss)
In your accounting software, you reconcile the bank account by allocating the movements to different accounts and codes. Any transactions allocated to income or expense account will flow through to your P & L Statement.
Why you need to review your Profit & Loss Statement
Reviewing your Profit and Loss (P&L) statement periodically has multiple important benefits for a business:
1. Cost Control: A P&L statement shows where your money is going, which allows you to identify and reduce unnecessary spending. This is crucial for monitoring and improving profitability.
2. Identifying Trends: By comparing P&L statements over different time periods, you can spot trends in income and expenses. This can help you predict future performance and plan for potential challenges or opportunities. This is so helpful in seasonal businesses.
3. Financial Health Monitoring: Regularly reviewing the P&L helps you assess the overall financial health of your business. By tracking income and expenses, you can identify if your business is profitable or if there are areas that need improvement.
4. Decision-Making: The P&L statement provides key data that can support important business decisions. For example, it helps you determine if you need to cut costs, adjust prices or evaluate staff numbers.
5. Tax Planning: Reviewing your P&L statement allows you to know your business profit and prepare for any potential tax bills. Reviewing your P & L before the end of the tax year enables tax minimisation strategies to be implemented. It also allows you to be aware of an estimate of tax payable at the end of the financial year for cashflow budgeting.
6. Setting and Reviewing Goals: A P&L statement helps you set realistic financial goals and measure the progress of these goals over time. You can also use it to evaluate the success of decisions and strategies implemented throughout the year.
Reviewing your Profit & Loss Statement in real-time is the key to having your business thrive. It allows you to identify issues immediately, evaluate your business goals and implement successful strategies.
So, set your goals. Make time to review your P & L every month or quarter, and monitor your business’ health & wealth!
Disclaimer The circumstances of each business are different. This document is not financial advice and does not take your personal circumstances into account. Use this guide but consult your accountant or financial adviser for information specific to your circumstances.