Saturday, April 25, 2020

How Small Business Owners Should Use a Profit and Loss Report

Work Smarter... Not Harder

During my time in consulting with small businesses, I've observed that many very rarely use the information available to them by way of a profit and loss report. Often, these owners are too busy looking after employees or contractors; taking care of clients or customers; or taking time to produce products and / or services for delivery. Often, they are working just to survive. It's the American Way, right? An honest day's work for an honest day's pay. I still believe there's some merit to this blue collar working philosophy, but it largely fails to help the small business owner progress in achieving the ultimate goal of sustainable profits and growing cash reserves that are unrestricted. What's the one management tool needed to help these small business owners achieve these profits that lead to robust cash reserves? It's putting to use the information available in the profit and loss report to operate the business in the most efficient and focused manner possible But, how does one go about doing this?

Nothing Happens Until a Sale is Made

In learning to put to use the profit and loss report, the most important piece of information available are the sales numbers. When looking at a profit and loss report, the sales numbers are listed first at the top of the report. The sales section of the report shows how much product and / or services has been sold over a certain period of time such as a day, week, month, quarter, or year in a dollar amount. Although this dollar figure is important, it doesn't help you unless you understand the activities that are driving this amount. The more detailed the sales section of the report, the better use to the small business owner it is. For example, for a weekly profit and loss report, it's not enough to just notice that I've sold $10,000 worth of products or services. I need to know how this happened such as what product and / or service sold and how much of what specific product or service sold? At what price point did these sales occur? When did these sales occur? How was payment received for these sales such as cash or credit? Were there discounts and other allowances made in order to motivate these sales? Were there any refunds given or returns made? 

As you can see, by having the proper level of detail from the sales section on the profit and loss report, you are able to see without seeing the activity that's driving sales in the business which is quite important because without sales there's no business. Also, by asking these questions about the sales section, you are able to concentrate your efforts on areas that need your attention such as investing time and resources in product and / or service development, restructuring pricing and offers based on customer's perceived value, increasing time and resources in marketing and advertising, hiring outside or inside sales help, looking for patterns or oddities especially when comparing to budgeted amounts, etc. Now, we're getting into the use of the profit and loss report as a real life management tool for operating the business and not just a do nothing report that's given to a banker or investor when money is needed or the tax authorities when you're audited or assessed a tax. 

Next post, we'll talk about the cost of sales section of the profit and loss report. Stay tuned...