Today, I want to talk a little bit about keeping close tabs on your business. I will share some basic financial concepts, ideas and experiences that will hopefully provide you with some great insights. The significance of a Profit & Loss statement in your business cannot be over stressed. The P&L could mean the difference between perduring or blundering. Actually, I need to rephrase this, knowing what your business is telling you financially via the Profit & Loss statement will mean whether you have a profitable business or if the business has cancer!
The importance of looking at your profit and loss statement every so often, will make a huge difference. Depending upon how much activity your business is having, is how often you should look at the profit & loss statement or P&L. For example, I look at my P&L every month. This is not a Business Plan that once you are done with it, it goes in a drawer where you won’t look at it anymore. Ok, not everybody does that, but some people do!!
The P&L it’s nothing more than a rundown of income versus expenses for a designated period of time. Some people call it a snapshot in time!
I have attached a sample P&L as a reference, see below imbedded figure. If you are interested in an editable P&L, contact me and I will send it to you. The figure is using made up numbers to demonstrate some arguments. I will highlight key terms, so that you can reference it back to the sample figure. Ok, let’s go through it.
Note January 2014, Our Sample Business generated $31,200 Total Income ($30,000 Sales + $1,200 Total Income). Our Sample Business had $30,115 worth of Expenses. Note that the majority of money went to inventory. So far, Our Sample Business is making money ($1,085.00 Net Income).
Moving on to February 2014, Our Sample Business generated $29,500 Total Income ($25,000 Sales + $4,500 Bonuses). BUT, Our Sample Business had $30,095 worth of Expenses. Note that the majority of money, again, went to inventory, but the income was slightly lower. In February your business just ran in the RED (accounting term to let you know that you ran negative), hence Our Sample Business lost money (-$595.00 Net Income). At the end of the 2 months combined note that you are still $490.00 ahead (Net income), according to our sample.
What does all this mean to you as an entrepreneur? You may have to make some decisions. Look at your expenses, look at your budget (if you have one) and make adjustments accordingly. Also, look at your pipeline, this may be the slowest month for your given business. If you have a budget, verify what went wrong. Compare if this situation was expected? If it was, then next month should get better, maybe? If you don’t have a budget, it is time to create one.
Ponder the following questions:
- Budget vs Actual (P&L)
- Have you created a budget yet? If you haven’t this is the best tool to make one. On the same thought, the P&L is the best tool to make adjustment to our existing budget that you have already created.
- Are you on track with your budget?
- Did you budget for this kind of situation?
- Can you cut back on expenses?
- Is your sales pipeline feeding you as much business as possible?
- Can you increase your sales pipeline?
- What went wrong with expectations VS reality?
- Did something go wrong, or was this situation expected?
- How long can you stay in business running upside down?
- Lessons learned?
TIPs (To Improve Processes)®
- TIP #1: Have a bookkeeper do this kind of work. Even if you can can keep track of your business financials, I will STRONGLY suggest you against it. Here is why, the Bookkeeper gets paid to keep track of the business income and expenses, in a timely manner (Key). As an entrepreneur, your job is to make decisions, swift ones about your business.
- TIP #2: Trust but verify! Look at the P&L, does it make sense to you? Do a “soft audit”; verify some of the numbers or all the figures within a period. Remember that since this is the best way to know where you may need to make adjustments, the P&L, HAS to be right, not “kind-of-right”, but right!
