Profit & Loss Statement; Why you need one and the truth it tells you about your business
Updated: Feb 15, 2020
If you are buying your first business, own a business, or looking at a resale, understanding a P&L are crucial. I've asked my friend Shauna Jones, CPA to write an article about what to look for when it comes to a Profit & Loss Statement.
A Profit & Loss Statement tells you a story about the financial well being of your business. It answers questions like:
Is my business profitable?
Do I spend too much money?
Are my prices too low?
Which of my revenue streams is most profitable
Where should I invest more money back into my business
Is my business sustainable?
If you don’t have one or don’t know how to read it, you are leaving money on the table. A Profit and Loss allows us to make smart business decisions to keep the needle moving in the right direction. If you don’t know where you are starting, how do you know if you get to where you are going?
For someone like me, it’s easy to read a P&L and tell you where you are leaking profit, what you need to do to improve your bottom line, and how to make sure your business is actually sustainable (if you got hit by a bus, would your business still survive?). But for the non-accountant, it looks like a pile of random numbers that just adds stress to your day.
When evaluating your P&L, consider these tips and really ask yourself these questions:
Sales doesn’t mean squat- I know, I’m going to get in trouble for saying this, but it’s true. Kind of. You can have a really magical, beautiful sales number but it’s really all about what lurks underneath that. Are you spending too much of your revenue? Do you have streams of revenue that are just not profitable and weighing down the ones that are? If you spend every cent you bring in, you are not profitable or sustainable. You’re one bad month away from financial distress. It is important to be evaluating each stream of revenue to seek out problem areas.
First place to look is your profit: Skip getting excited until you look at your bottom line. Are you in the red or black? People think, I don’t want to show a profit because then I have to pay taxes. First sign of a healthy business is profit and paying taxes. Don’t dupe yourself into believing you need to spend it all, that’s an unhealthy habit that will get you in trouble. That’s why we have Tax Strategists, they help you pay the least amount of taxes while still making the big bucks (yes, legally).
Ratios & Percentages are your friend: The numbers themselves are great, but the fun is the crunching of them. What percentage of your revenue goes where? What line item on your P&L is hogging all your cash? Where did all your money really go? When you run a few analytics, it tells you more dirt. Then you can make smart business decisions and improve your numbers.
Don’t spend tons of money where it’s not bringing you revenue: Look, a fancy office doesn’t guarantee people will like you more, pay you more, or think you are the best thing since sliced bread. If your office rent and monthly expenses that go along with it are the biggest chunk of your cash, it’s time to re-think this. Is that really where you want your money going to every month instead of in your bank account?
Your Paycheck Matters: Quit working for peanuts. When I ask business owners if they are happy with the amount they pay themselves, to date, they’ve all said no. If you aren’t happy with how much you are getting paid, it’s time to figure out a new strategy. Unless you are a W-2 employee of your business, your pay isn’t even reflected on the P&L (owner’s draws are on the balance sheet. Be sure to check with a tax professional about the type of legal entity you have- that determines how your owners draw is handled). Which means, if you have no profit on your P&L, you are taking money out of the business that you don’t actually have. And that’s a massive problem. Talk to your Tax Strategist today to find out if making yourself an employee makes financial sense.
What’s the real story: It’s time for the big picture. If you aren’t profitable, that’s your first problem that you need to solve. Overspending and lack of sales growth each year means you aren’t sustainable. So, what do you really want out of your business? Do you want to stay in a vicious cycle of broke or would you rather move into higher profits and start to generate personal wealth?
Shauna is a CPA that helps businesses get a healthy flow of cash back into their operations so they can worry less about the future of their finances and focus more on the reason they started their business in the first place. She owns a consulting company whose mission is helping business owners create more profitable and sustainable businesses so they can generate personal wealth. Shauna loves helping entrepreneurs gain freedom from money stress and increase their owners pay without working harder. After all, we didn’t start our business to be broke. You can reach her at Shauna@sljprofitconsulting.com or visit her website at www.sljprofitconsulting.com.
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