As a business owner, cash in and cash out of your bank account may be the primary focus. However, the true definition of a profitable business is determined through consistent tracking of each client, each sale and all related expenses.
Why is an accurate Profit & Loss Statement (aka P&L, Income Statement) necessary?
- The P&L is a great tool for tracking your business’s performance, where the expenses are matched against the related sales in a given time period (month, quarter, year.)
- Having a correct and current P&L allows you to notice trends and patterns sooner, to make more timely decisions and take action with expenses. (Prepare P&L then click columns by month)
- You can validate your return on investment down to the project and/or customer level. (Use P&L by Customer, P&L by Class)
- The IRS also requires report of legitimate profits & losses incurred annually to determine taxes. Vague or inaccurate P&L statements can not only impact your tax obligation, but can potentially raise red flags, leading to audits or fines.
- Investors, bankers and creditors rely on this information to be accurate and fairly represent the performance of your business. You want the financial information to cohesively tell the story you are sharing with investors. For example, we are growing at a certain rate OR Direct Costs are stable at an expected %.
Top Priorities in a P&L:
- Net Sales Revenue - make sure to include credits or discounts
- Costs of Good Sold- all expenses directly related
- Selling & Administrative Expenses
- Other Income & Expenses
We recommend reviewing and assessing the P&L at least once a month and comparing against previous periods. Consider ‘memorizing’ the reports outlined above in QuickBooks. Then you can find the reports under “Your Custom Reports” on QBO or Memorized Reports in QB Desktop is fast and easy. You can even set yourself up to receive reports that are important to you via email monthly or weekly.
Comparing your cash flow statements and bank reconciliations against your P&L statement can provide valuable insight to prepare for growth spurts and lean times. If you need help determining what reports would be most helpful, generating your own custom reports, assessing the accuracy of your P&L, or determining if YOU are profitable, we can help! I am Kathy Dise from BudgetEase here to make YOU more profitable. Questions? You can reach me at kathy@budgetease.biz.
Stay Tuned for next week’s blog on "Know Your Real Worth – The Balance Sheet Basics."