Your profit and loss statement - also known as an income statement - is the record of your company's revenues and expenses over a specific period of time.
The Income Statement - Also known as the Profit & Loss Statement - is probably the most familiar financial report to small business owners. You know you need one; you are pretty sure you know where to find it in your software, and some of the information even makes sense when you look at it!
But let’s take a look at some of the things you might not know about your income statement.
A good bookkeeper will provide these to you every month. Still, you should also know where to find it in your accounting software (i.e., Quickbooks, Xero, Sage, etc.) Get familiar with this report and look at it at least monthly for better financial health.
Think of it as taking the temperature of your business.
The Income Statement begins with a well-thought-out Chart of Accounts.
The first thing you’ll see is your Revenue Accounts. Those accounts tell you where your income is coming from. You may have your revenues divided by business segment, location, type of service offering, product sold, etc. Having these breakdowns is a great way to quickly see where your business is flourishing and what area may need a little help. Now, there are definitely more in-depth ways of tracking these segments as your business grows - such as by classes, locations, or programs - but in the beginning, a simplified chart of accounts model will still serve you well if designed correctly.
The next section of the statement has your Variable Costs. These line items are the cost expended for each sale. It often goes by Cost of Goods Sold or Cost of Services (also known as COGS or COS). These are a function of your sales - so as sales increase, costs increase. If there are no sales, there will be no cost here. For example, if you have a Yoga Studio, COS for your classes would be the instructor’s salary. No class, no instructor - therefore no COS.
Another example: For clinicians, your COS would include most of your medical supplies since they are mostly single-use per patient. You would also include your clinician and assistant salaries.
Even if you are a sole practitioner, you are probably familiar with having to pay credit card fees to accept these as a method of payment. Those are also a cost of service. The fees go up as you make more sales. It’s a good problem to have.
After Variable Costs, come the Fixed Costs. These items are business expenses that require payment regardless of how many sales you make. Common examples are Rent, Utilities, Administrative Staff, Marketing, Business Insurance, Etc. This section is also commonly referred to as Overhead.
And finally, the last number on your income statement is the actual Profit OR Loss your business has produced for the period of the Statement. This number is simply a calculation of your total revenues minus the variable and fixed expenses. You’ll want to make sure your report is reflective of the period you’re attempting to assess - such as the prior year or the most recent two quarters for example.
Example of how to read a Profit and Loss Statement
Now, let's talk about why it’s important:
The one most business owners are familiar with. Why? Because you need it to file your taxes and stay on the right side of Uncle Sam. Many small businesses do their bookkeeping because they HAVE to in order to remain compliant with the government and regulatory agencies. Don’t get me wrong; this is very important. However, there are other reasons you should be paying attention to this report.
DECISION MAKING -
Looking at your company’s profit and loss statement gives valuable insight that managers and owners need to make wise operational decisions. When you can see the amount of money you have made and spent during the period in real-time, you can better decide whether a new purchase, program, or marketing campaign is within your budget or whether it's necessary to trim expenses for lean operations.
PLANNING & FORECASTING -
Once you get beyond looking at the monthly income statement and into multi-month or multi-year comparisons, patterns begin to emerge in the story of the data.
Here, stakeholders can get a bird's eye view of trends, patterns, and the flow of business over time. This gives you a better idea of the growth of the business, busy or quiet times, responses to marketing campaigns and points of stress. Which of your programs is most profitable? Which needs to be scaled back?
For example, if you know lots of your customers take a vacation in the summer and your sales slow down, you can plan to offer alternative options such as virtual services or sales promotions to bring in a different clientele for the summer - hellooo travelers. You may also plan reduced staff time or take your own vacation during that time.
Alternatively, when you have your busy time, you should prepare by staffing up and creating systems and efficiencies to ensure all your customers are cared for smoothly.
Forecasting includes taking these historical trend numbers and predicting reasonable growth patterns into the future. Using the company’s own data ensures these targets are realistic and achievable. Your bookkeeper can even take the model one step further to predict what-if scenarios to help with decision-making.
Overall, the profit and loss statement is essential for understanding a company's financial performance and making informed business decisions.
By cultivating a habit of reviewing your income statement regularly with a mindful and clear approach, we can focus on the goals and health of the business on your path to profitability. Make it a priority to set aside time each week or month free from distractions. When you're ready to take the next step toward financial clarity and peace of mind, find a skilled bookkeeper who can guide you through the labyrinth of financial data.
See you along the journey,