One of the most important indications of a business’s success, or failure, can only be determined from a monthly P&L. If you fail to produce one every month, how will you know if you are making money?
The common excuse used for not having up-to-date financial information is, “I cannot afford an accountant.” My answer to this is, for $25 to $30 an hour, you should be able to afford one once or twice a week. If not, you are probably losing money or not making much of it.
People who tell me they are doing well and do not produce a P&L statement are just kidding themselves.
Let me reiterate, without a proper, detailed monthly P&L Statement, you are operating your business in the dark. To run a business successfully, you need light, and lots of it.
A detailed P&L is a breakdown of income and expenditure that will show your monthly sales and what you have spent to get your sales income, such as your overheads and general running costs.
From this information, you will be able to see sales trends, such as: higher sales in one month and lower in another. This will lead you to investigate if it was because of a holiday period, school holidays, hot or cold weather.
Why did sales drop or increase when they did? If you study and investigate these sales trends, you should find out why your sales were different each month.
Once you have the answer, you can then direct your advertising and marketing to peak periods and reduce them when the sales are low. You can also devise promotional activities when times are good and even when they are bad to help improve sales.
Likewise, your expenses can be looked at carefully to see if you can reduce them at bad times, which will produce increased net profit.
Going through the list of expenses each month will also enable you to look at ways of reducing costs by reorganizing some of the things you do.
One of the reasons why businesses do not make a “true net profit” is they often forget to include one vital cost: their own salary. You must always add in the salary you think you should earn, even if you defer it initially. At least, this will take into account what you want to earn once the business is successful.
If you forget to add in your salary, you will need to make substantial increases to your sales price later, which will cause you problems. Don’t forget to include yourself as part of the overhead, so when the business starts to do well, you will be able to earn a decent salary.
No matter the size, every business needs financial information. If you study it, you will undoubtedly know more about your business.