There are a few reports that you, as a business owner, should be reviewing regularly. One of these reports is the Profit and Loss (P&L) Statement, also known as the Income Statement. A P&L Statement is “A financial statement that outlines a company’s revenue, costs, and expenses over a specified period of time.” (Investopedia) In general, the report allows you to see whether your company is making a profit. Your company can make a profit in two ways. The first is by increasing your revenue, or the money that is generated from the sale of your goods or services. You can also make sure you are generating profit by reducing costs.
The Profit and Loss report usually follows a specific format. Your revenue will be shown at the top of the report. Next on the report, you will see your costs of doing business. These include your cost of goods sold, which are the direct costs it takes to produce and sell your inventory, your operating expenses, such as advertising, utility, supplies, etc, and your tax and interest expenses. All these costs will be subtracted from your revenue and the final result will be your net profit or loss, which is the money you made or lost from the period.
Interpreting Your P&L Statement
It is important to remember that your P&L Statement shows the results of your business operations over a specific period of time, such as a week, month, quarter, or year. You will get the most benefit from looking at your P&L report by comparing it to a similar period.
1. Let’s start with revenue… If you are looking at your past week’s revenue, you will want to have your past week’s P&L report ready to view along with the P&L report for the week before that or even the P&L report for the same week of the previous year (for example - the first week of January 2024 compared to the first week of January 2023). Then, you can begin to compare and analyze the numbers. If there is an increase in revenue, think back to what you did this period that might have differed from the previous period that contributed to this success and make a note of it for future application. If there is a decline in revenue, was there possibly some external economic or market event that could have caused a dip in sales? Some factors that could affect your revenue include product quality, product price, marketing efforts, lack of inventory, communication issues, emerging competitors, and so on.
2. Now, continue down the page and begin to look at your expenses. Again, compare these numbers to previous periods. Do they look reasonable? Is there an expense in the report that is inaccurate and needs to be disputed? It is smart to create a budget, so you can base your spending off the budget numbers and eliminate overspending. Looking at your expenses can help you decide if you need to cut spending in a certain area, such as paying for technology you hardly use or paying for advertising that is resulting in little to no profit. Do you need to renegotiate with a supplier? Or are you providing a service that is not as profitable as you had hoped compared to the time and effort that it requires?
3. If you are a retail company, you will next want to move on to calculate your gross
margin. “Gross margin is the amount of money a company retains after incurring the direct costs associated with producing the goods it sells.” (Investopedia) The formula for calculating gross margin is as follows: (Revenue-COGS)/Revenue = Gross Margin. Gross margin helps you determine if you are making the profit you desire from the sale of your goods. It can be beneficial to compare your gross margin to your industry’s average gross margin. If you would like to know your industry’s gross margin, you can do a simple Google search. Here is a link you can also try to find your sector’s gross margin: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html.
4. Finally, you will want to evaluate your net profit. This number points to your company’s financial health. If you experience a continued increase in profit, how can you leverage these funds to create more growth? If you experience continued loss, what can you do to ensure your company stays sustainable?
While this process may seem somewhat overwhelming. The more consistently you look at this report, the better you will be able to understand it and its value to your company.
Create your P&L Report in QuickBooks
QuickBooks provides an easy way to pull a Profit and Loss Statement for your business. To access the report you can follow these steps:
1. Click on the Reports tab in your main menu.
2. You will find your P&L report in the Standard Business Overview reports section. As you can see in the image below, there are also some more detailed and specific P&L reports that you can run if you would like to view the numbers in a different format. I suggest clicking the star button on the P&L report that you will review regularly. Your favorited reports will show up at the top of the Reports page for easier access.
3. Once you click on the desired report, you will have the following filter options:
You can decide what period you would like to review, how you would like your columns displayed (by totals, days, weeks, clients, products/services, etc.), and which period you would like to compare your data to. Once your filters are selected, run your report.
Here is an example of what your Profit and Loss Report might look like in QuickBooks.
When reviewing your report, you can click on the totals to find a breakdown. This can be useful if a number looks high or low compared to another period. You want to make sure all your data has been entered accurately in QuickBooks. Once you have ensured that all of the data is correct, you are ready to start interpreting and implementing positive changes to help your business succeed and grow!!
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