The profit and loss statement, or what is more commonly known as the income statement, is a simply a statement that tells you your revenue minus your expenses.
But when you look at this statement in more detail, it is a tool for you to evaluate your business, manage your business, and can even help you avoid financial difficulties.
How can you use your profit and loss statement to grow and manage your business?
Your profit and loss statement should be reviewed every month.
This really does tell the financial health of your business. You’ll spend some time reviewing your expenses and your revenue.
But what other warnings does your profit and loss statement tell you?
Warning #1: Decreasing Profit
If your profit is consistently decreasing, this is a warning sign to look further at your business and your money to see what is going on.
This could be caused by spending more money.
It could also be caused by bringing in less money.
So you need to take some time to look at it much deeper:
Are you buying things that your business needs?
Are you running experiments in your business that cost a little bit more money?
Have you been selling at the same rate that you were selling before?
Have you introduced something new to sell that just didn’t do too well?
Do you need to raise your prices?
Are things you usually spend money on costing you more than usual?
Did you bring on additional team members?
There are many different factors that can come into play when your profit starts decreasing. But you need to spend a little time looking into this.
Warning #2: Business Owners aren’t paying themselves a regular salary
Yes, your salary does depend on whether or not your business is actually making a profit.
But the goal of your business is to be able to pay yourself a regular salary, that is more than minimum wage in your local area.
You have your own business so that you don’t have to work a job earning a paycheck. But you still need to pay yourself. And you should be paying yourself a regular salary.
Warning #3: The amount of money owed to you is increasing
Maybe you have clients on payment plans and they aren’t paying on time.
Maybe you aren’t following up on your past due invoices.
Maybe more clients are just aren’t able to pay you right now.
There could be a number of reasons why the amount of money that is owed to you is increasing.
But this is something that you really need to look into. Lack of money coming into your business means you could have problems paying your bills. You could have problems paying yourself. You don’t have enough money to put in your savings. You don’t have enough money to pay your taxes. Your credit card balances are increasing.
To prevent your clients owing you a lot more money, make sure you have invoice follow up systems in place. If someone doesn’t pay their invoice on time, follow up immediately.
When a credit card gets declined, follow up with your client to find out why the card was declined.
The money coming into your business is crucial for you to keep running your business. And you need this money to keep flowing in.
Your Profit & Loss Statement can show you signs that something could be going wrong in your business
When your business isn’t bringing in enough money, you will have an avalanche of problems. And the same thing will happen when you spend more money than you usually spend in your business.
By regularly looking at your P&L, you’ll be able to see what is going on in your business.
You’ll be able to see when there are patterns and seasons that happen. Like are there certain times during the year that you end up spending more money in your business? And are there other times during the year that you end up making more money?
Can you then use those patterns to be able to make better plans for your business?
When you read your P&L regularly, you’ll see these things in your business.