Thursday, April 23, 2020

Why Profit and Loss Reports Are A Small Business Owners Best Tool In Running A Business

A little over six months ago, I attempted to record a webinar series called, 'Small Business Financial Literacy 101' and it was an epic fail. Don't get me wrong, I was rather encouraged that I had the wherewithal to discipline myself to screen record 3 videos and upload them to my LinkedIn page. Damn proud because I had been thinking about doing it for AT LEAST 2 YEARS. Yep... procrastination is a mother for sure. The reason I considered it an epic fail is that the response I expected did not happen.... and what response was that you ask? I wasn't looking to gain numerous likes or even shares; my aim was to connect to those small business owners that struggle to understand the operations of their business from a numbers perspective.

Seeing the Unseen

When I began working with small businesses in the early 2000's, I was trained in dealing with them from an accounting and financing book perspective. I hadn't operated a small business let alone help manage one. I only saw and understood small business from financial statements and annual reports. It wasn't until I got fired from my job at the bank in 2008 and began working for and consulting small businesses that I made the connection between numbers and real life activity. That's when I truly knew how valuable a small business financial reports are. Even if you're operating a small business with minimum staff (i.e. one or two people) and making less than $125,000 in sales per year, listen to me, you still need to utilize a profit and loss report, a balance sheet, and a cash flow statement. Getting by on just relying on bank statements especially when you're still using a personal checking account to run your business transactions through is a huge mistake from a planning, tax, and operations perspective. 

Do You Know Where You're Going and Do You Know Where You've Been?

This is the essence of having and using a profit and loss report to help in operating your small business. It helps you to make sense of where you've been and also provides guidance on how to get where you want to go. How, you ask? Profit and loss reports capture the important activities of your business in three buckets: Sales, Costs of Sales, and Operating Costs. In each one of these buckets, small business owners are given information that captures the essence of the business's activity over the last day, week, month, quarter, or year depending on the accounting system used. It's not just enough to be able to provide a profit and loss report to your bank or even the IRS when required, You need to learn to use the profit and loss report to help in managing and operating your small business to minimize the risk of failure and increase the chance of survival and profitability.