Do you want to get rid of that nagging voice in the back of your head? You know the one. The one that keeps telling you that something could be terribly wrong with your company’s financials but it is best not to know. So ignore it.
Don’t ignore it. Find out the facts and rest easy. As we explained in last week’s blog, understanding and managing your company’s financials should be your top priority. But for whatever reason business owners prefer to ignore the financials.
This week we answer the question: Are we making any money? So this week we are going to explore the exciting, scintillating, sexy Profit & Loss. As the name implies this tells you if your company is making a profit or a loss. It is organized into three sections.
Section 1 ‘ Revenue
- Revenue: This shows how much revenue your business has earned. Note the term “earned”. This is the total of all sales (less taxes) INVOICED.
- Cost of Revenue. It costs money to make money. You need to pay people to deliver your service. You need to buy raw materials to make your product.
- Subtract Cost of Revenue from Revenue to get a number called Gross Profit. Different industries have their own specific benchmark of what the industry Gross Profit should be. You want to measure yours against your industry norms so you know if you are doing well or badly.
Section 2 ‘ Operating Expenses
- These are the expenses required to operate the business.
- There are 2 types of operating expenses:
- Fixed: these cannot change without a major change in the business. Examples include Rent, Salaries (especially yours), Lease payments etc.
- Discretionary: these you can easily change based on changing circumstances. Examples include, marketing costs, staff parties, flowers for the office.
Section 3 ‘ Is the business making money or losing money?
If the revenue is more than the expenses it is making money. Visa versa and it is losing money. But you can’t wait until the end of the year to find out; that may be too late. You must regularly, on a monthly basis, review the profit and loss so you can take corrective action early and quickly.
So how do you review the Profit & Loss? Not by staring at it! Open your mind; let the numbers talk to you. Ask them the “why”questions:
- Why is this expense so high? Is there something we can do about it?
- Why is the payroll lower than expected?
- Why is the revenue swinging up and down each month? Are we not invoicing regularly?
- Why did we make a loss this month?
- Why is the year to date profit lower than I expected?
- Why why why! Dig deep and understand the true meaning of all these numbers.
And take action. You want to improve the profit or correct a loss. Some examples:
- Launch a sales campaign to increase revenue
- Postpone some discretionary expenses; e.g. buying a new car
- Implement a referral program to bring in new revenue producing clients
- Cancel future expenses that are not essential
- Look for additional revenue opportunities with your existing clients
So there it is. A powerful report that is easy to use. So rid yourself of that nagging voice and manage the Profit & Loss on a regular basis. You will learn to love it!