The Income Statement (Profit & Loss) Part 2

Posted by on Jul 15, 2010 in Accounting, Bookeeping, Income Statement, Information, Preparer, QuickBooks | 0 comments

It has come to my attention that many of you could use some help in understanding how to use your Profit & Loss effectively in managing your business. Even more so, Some of you may not even know that this is a tool to use in managing your business. So here is just exactly what the Profit & Loss Statement is good for.

The Profit & Loss Statement is your major management tool. This report shows you many things that you will want to be aware of as you are managing from month to month.

The Profit & Loss lists all your income and all your expenses. It will first list your income and then list your Cost of Goods Sold (COGS), subtracting the total COGS from your total Income. COGS are the expenses that are directly related to your service or product you sell.

For example:

 if you are a contractor, then your COGS could be your labor, the building materials, the permit, things like that.

 Each industry has its own COGS. So the number that you get from subtracting your COGS from your total income is your gross profit margin. This number is very important and helps you to determine if you are making a profit on your services or product. This is not the infamous “bottom line” though, because all companies have “overhead” or expenses that are not directly related to the service or product.

For example:

your accounting, the receptionist, taxes, office supplies, and many other expenses not directly related to what you do or sell.

So after you have subtracted the COGS and the overhead expenses from your income, that is what your net profit is for the month or the infamous “bottom line.”

There are many things to be aware of and to look for on your Profit & Loss in helping you to manage your company. The following is a Top Ten list:

  1. Did I make a profit? If so how much?
  2. Use your Profit & Loss to determine your financial viability, not your online bank balance. Small business owners think that if they have money in the bank, they are good. The problem is that your bank account is only one facet of your business at a specific point in time, and your Profit & Loss will provide you with the overall picture.
  3. If I did not make a profit, why?
  4. Did we spend too much on a given expense, like tools? Computer repairs? Cell phone fees? Meals out? Advertising?
    1. You can see this at a glance as a total for each expense category on your Profit & Loss.
  5. How much income do I need to break even?
  6. How many months have I lost money?
  7. Based on your numbers, you will be able to tell if you need to get a loan.
  8. Do you need to lay people off?
    1. You can determine this from this Statement.
  9. Do you need to make your company more efficient in order to break even or make a profit?
  10. Based on your income numbers, you might find one income source essentially non-existent and another is booming. This will give you direction on what to promote, what to put your money into and what not to.

So as you can see, your Profit & Loss will provide you with crucial info in the management and direction of your company.

You can use your Profit & Loss to help with many facets of the business. But as you may have figured already, it is very essential that your accounting/bookkeeping be accurate, because if the accounting is off, then these reports are incorrect and therefore, worthless. If you have QuickBooks and do not know accounting, it would be good to outsource the review of your books and maybe the entry of your transactions to a reliable accounting/bookkeeping service, so that you can have effective tools in your tool bag and have control of your business.

Understanding what to look for and how to use it can save your company in tough times and make your company extremely profitable in the good times.

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