Are you getting a profit and loss statement regularly? Because you should be getting one every month, at least.
Be honest with yourself. Are your books in order or are you just trying to file your tax return once per year? If you are a business owner, you should be setting aside a bit of time every month to review your profit and loss statement and your balance sheet statement as it’s an important tool for understanding your business’s financials and managing your operating costs.
Why should you review it?
Because your bank balance will betray you.
Successful business owners look over their profit and loss at least every month. This financial statement will give you a good idea about how your business is doing by plainly showing your revenue alongside your expenses. Don’t ever make the mistake of looking at your bank balance to make business decisions. You need to be reviewing your profit and loss statement to make those decisions, as your bank account may seem up, but your expenses will still be flowing in.
Because you can make comparisons.
Keep a folder, digital or paper, of your monthly profit and loss statements. This way, you can easily compare each month to previous months, and to the same month of the previous year. By taking the time to compare statements, you can look for trends to see what works and what doesn’t work. What services are profitable and which ones aren’t? How much are you spending versus revenue on IT or marketing? If you want to know how your business spending compares to your competition, you can find the answer in industry standards, for key financial metrics. Basically, they represent the average of key numbers collected from many different businesses and then sorted by industry.
We recommend checking out the recently released (January 27th, 2022) Version 1.0 of the 2022 North American Industry Classification System (NAICS). It includes notable updates related to the digital economy. Compare what percentage of revenue your industry typically spends on any one area of business. This way you can figure out, for example, what percentage of your sales most companies spend on marketing and what your margin should be on every sale.
Because you can track all three revenue lines.
Did you know that most businesses need three separate revenue streams? To stabilize a business, you can’t just sell your time on one revenue stream. What happens when/ if what you’re selling suddenly becomes unavailable or obsolete? Don’t limit yourself to only one source of income when you could have a few channels driving growth simultaneously.
How can you become diversified? Keep in mind that your goal should always be to make life easier for your clients. How can you best address their pain points? How can you create a more efficient process for them?
To see how balanced your business really is, get out a piece of paper. Divide the sheet into equal thirds, labelled with each stream (for example, Products, Consulting, Passive Income). Put each offering in the correct column, then put the revenue numbers next to each one. How does it come out? Your profit and loss will track all three – Products, consulting, passive income.
Because you can see when expenses are ballooning.
When you’re immersed in the day-to-day running of your business, it’s easy to get caught up in how you think your business is doing financially versus how it’s actually doing. Your profit and loss statement keeps track of expenses so you can see if any are ballooning. It’s hard to know when you’re spending $20 here or there. Every month, what does it all add up to? Keeping track of your business expenses helps you pull back, see the big picture, and really analyze your finances.
Once a year put your eagle eye on your expenses and reduce them by 10 percent. Figure out creative solutions for how to reduce or change those expenses. Tracking your costs needs to be a part of your ongoing operations. Maintaining tight control over your expenses is an essential part of maximizing cash flow and profits in your business. You probably don’t even realize it, but expenses tend to balloon over the span of a year. How much money are you spending on payroll versus advertising versus rent? What are your biggest buckets? If you’re looking for ways to cut, go after those big buckets first. Do you really need to be paying office rent when you’re working at home most of the time anyway? Do you use all of the subscriptions that you’re paying for every month and do any of them do the same things?
Because you’ll have a sense for whether it’s “right”.
Tracking your monthly profits and losses leads to accurate bookkeeping, which allows you to know if you’re making a profit or a loss, how much money you should be saving for taxes, your ability to pay any money you owe with only cash or assets, and to make forecasts. Soon you’ll have a sense of whether your profit and loss “seems right”? You’ll have a “sense” of whether it’s right or not, especially if you have a bookkeeper who is familiar with your financial situation and can give you professional advice on ways you can improve your business, both in the short-term and long term.
Most importantly, reviewing a profit and loss statement helps you learn from the past, to do better in the future. By building the habit of reviewing your budget compared to your actual performance, you will grow a stronger, healthier business. Studies have actually proven that companies that plan grow 30 percent faster than those that don’t. Set goals and measure your progress toward those goals every month to greatly increase your chances of business success.