What Your P&L Can Tell You About Your Business

Understanding Your Profit and Loss Statement: What Your P&L Can Tell You About Your Business

Your profit and loss statement, commonly known as your P&L, is one of the most useful reports for understanding how your business is performing.

It shows the income your business has generated over a set period and the costs and expenses incurred to generate that income. The difference between the two gives you your profit or loss.

But your P&L can tell you much more than whether your business made money. When reviewed regularly, it can help you understand what is driving your results, identify areas of concern and make better decisions about the future of your business.

What is a profit and loss statement?

A profit and loss statement summarises your business’s financial performance over a particular period.

It typically includes:

• Revenue: the income your business has generated from sales and other sources.
• Direct costs: costs directly associated with providing your products or services.
• Gross profit: revenue less direct costs.
• Operating expenses: the ongoing costs of running your business, such as wages, rent, insurance, software and marketing.
• Net profit or loss: what remains after all relevant costs and expenses have been accounted for.

Looking at these figures together gives you a clearer picture of how profitable your business is and where that profit is coming from.

Why is your P&L important?

It is easy to focus on your bank balance or how much sales have increased. While these figures are important, they do not tell the whole story.

A business can have strong sales but still struggle to make a profit if costs are increasing too quickly. Similarly, a profitable business can experience cash flow pressure if customers are slow to pay.

Your P&L gives you another perspective. Reviewing it regularly allows you to look beyond the headline numbers and understand what is happening within the business.

1. Are your sales growing?

Looking at revenue over time can help you identify trends in your sales.

Are sales increasing, decreasing or remaining relatively flat? Are particular products, services or customers contributing more to your revenue than others?

Understanding these trends can help you identify opportunities for growth, as well as areas that may need attention.

2. Are your costs keeping pace with your revenue?

Increasing revenue does not necessarily mean increasing profitability.

If your costs are rising at a similar or faster rate than your sales, your profit margins may be getting squeezed.

Regularly reviewing your P&L can help you identify increases in wages, supplier costs, rent, software subscriptions and other overheads before they have a significant impact on your bottom line.

3. What is happening to your gross margin?

Your gross margin is an important measure of the profitability of your products or services.

If your gross margin is falling, it is worth understanding why. Your supplier costs may have increased, your pricing may no longer reflect your costs, or the mix of products or services you are selling may have changed.

Improving your gross margin can have a significant impact on overall profitability.

4. Where could you improve your profitability?

Your P&L can help identify opportunities to improve the financial performance of your business.

This might involve reviewing supplier pricing, reducing unnecessary expenses, changing your pricing structure or focusing more heavily on your most profitable products or services.

The key is not simply to cut costs. Some expenses are essential to supporting growth. The aim is to understand where your money is being spent and whether you are getting the right return from that spending.

5. How does your current performance compare?

A P&L becomes much more useful when you compare it with something.

You might compare your current results with the previous month, the same period last year, your budget or your forecast.

These comparisons can highlight trends and variances that may not be obvious when looking at a single month’s figures.

How often should you review your P&L?

For many business owners, reviewing the P&L once a year is not enough.

Regular management reporting gives you the opportunity to identify changes while there is still time to do something about them.

Depending on your business and its needs, monthly or quarterly reporting can provide a useful view of your financial performance. It can also give you a better basis for making decisions around pricing, costs, staffing, investment and growth.

Your P&L is a tool for making better business decisions

Your profit and loss statement is more than an accounting report prepared for year-end financial statements or tax purposes.

Used properly, it is a management tool.

The numbers can help you understand what is working, where your margins are being affected and where there may be opportunities to improve the profitability of your business.

As your adviser, we can help you look beyond the individual figures and understand what they mean for your business. Regular management reporting can give you greater visibility over your financial performance and help you make decisions with better information.

If you would like to get more value from your P&L, talk to our Advisory team about how regular management reporting could work for your business.

Together we can achieve more.