Analyzing Your Financial Reports: Part 1 – Profit & Loss Statement
Financial records for a small business are easy to ignore with all that an entrepreneur needs to do. However, taking time to update and review your records can help you be more successful in your business.
We’re here to help with a blog series diving into some of the basics that might help the small business owner gain valuable insights from their financial statements.
The Income Statement or Profit and Loss Statement (P&L), is one of the first reports (and sometimes the only report) that a business owner looks at. This report shows income and expenses for the period. The amounts may be displayed based only on cash in and out (“cash basis”) or on sales and expenses incurred and recorded, but not necessarily paid (“accrual basis”).
The tendency is to look at sales and gross profit - and sometimes net profit or loss. While these are all important numbers, digging deeper can provide some additional insight and clarity. Here are some additional things to consider:
Compare your numbers from the previous three months to last year’s numbers for the same period. What changed? What stayed the same? Are the changes reasonable and understandable?
Look at specific accounts. Did one jump a lot this month? Why? Do you know what is going into these accounts each month? Recurring charges are easy to forget about – are there items you are paying for and not using? Is something increasing in cost that needs to be looked at?
How are sales? If they’re up, are your costs increasing by the same proportion? Are they decreasing? Are certain costs increasing and others decreasing?
Is there something specific that is causing sales to increase or decrease - a product line, outside factors, seasonality, etc.?
If you generally run reports on a cash basis, but put your invoices in when you bill the client and put your costs in as bills (not expenses), you can try running your reports on an accrual basis. If you use the date of incurred income and expenses, this can show you how costs are lining up with billing. Is your bottom line what you expected?
What other ways can you increase your bottom line without increasing sales?
Are there industry averages available? If so, how do you compare?
Financial statements can be a valuable tool when business owners take time to dig into them. Let us help if you’re struggling to get your accounting under control or having trouble understanding your financial statements.