Your Profit and Loss Statement (P&L), when well thought out and properly crafted, provides the most important information at a glance, plus it enables you to mine key details.

Business owners often accept a generic layout – even when, without a doubt, each and every owner will then tell me their business is not generic.
In this day and age of packaged computer accounting systems many people rely on the auto-produced General Ledger/Chart of Accounts this statement applies to big and small – I have seen both Quickbooks and SAP implemented without a second thought to the structure of the ledger.
The alternative is in some ways worse, no P&L is produced at all!!!   BAS data is listed in a spread-sheet and sent off to the accountant for lodgement – without any review or analysis.
Once a year the Accountant categorises expenses in the tax return, but not much care is taken to check the relevance of these categories to the business owner.
The result of either of these approaches is the P&L is unable to effectively assist business owners in their business decisions.
Three Tips to get your P&L to work for you:

1. Relevant Set-up

What varies from company to company, and even office to office is the issue of:

what is the most important info for your business?”

 Think about what is important in your decision making, how your business operates AND what you might need in the future. The best way to answer these questions is by looking at your business plan and from thinking about your company mission statement, your SWOT, your goals; from taking a quick review – it should become pretty clear where you do and do not want to earn and spend money….

A. Sales –  Do you have a variety of brands or products that you need to track at this level? Or will just one line be sufficient?

B. Direct Costs –  Costs directly associated with the making of products and services ie if you don’t sell anything there will be no costs here. This would include the price of the raw materials, transportation costs for having the material delivered, and all other costs that are sure to be borne when the production process is on.

C. Indirect Costs – Costs that are not linked to making sales; therefore exist even when no revenue is made. This includes salaries for administrative staff, rents and electricity bills etc.

Sales – Direct Costs – Indirect Costs = Profit – the one of the most important statistics to regularly monitor.

 







 

2. Enable your P and L to Summarise

Whilst the devil is in the detail, too much detail can actually detract from the story – it is important you are able to make quick and effective overviews regularly.
Make sure you can get a summary Profit and Loss as well as a detailed one.  We usually recommend any number that is generally more than 5% of cost should be appearing on your P&L as a separate line item; and items less than that we bundle…
e.g.s

  • Salaries, on costs, super, amenities, training  = PEOPLE
  • Travel, and Motor Vehicles = TRANSPORT
  • Rent, electricity, rates, Repairs and small assets = FACILITIES

Aim for 10-15 lines in total on your summary reports – so your eye can see it all at a glance.
Don’t forget Rule Number 1 – whatever is most important should be most obvious.  The outcomes here will depend on the flexibility of the software you are using – but even a simple excel sheet can be setup with sub totals and summaries.  In larger systems like SAP General ledger codes can be mapped to total within headings, but it still remains better to also group codes as like with like (as it makes the details easier gloss through)
 

3. Include a Comparative

Always include a relevant prior period for comparison – if this is a weekly report, include two prior weeks, if it is a monthly report for July include June as the prior month PLUS include July from the prior year.
Familiarity and comparison will reveal trends.  Trends will enable you to quickly able to spot something odd and investigate (it may end up as a simple coding error), or react effectively to a price hike – best quickly change suppliers or increase your own prices, instead of bemoaning a profit drop months after the vendor has changed.
Play around with the comparatives, cycle through several different comparisons periods – last period one week, last month the next week this time last year the next, and then start back again.
Ideally, look at the summary report every week and the details monthly.  It only take 3-5 minutes to run it and check it and the benefits are exponential.  (If you don’t know how to run your own P&L I challenge you to ask your accountant to show you how this week – the extra knowledge at your fingertips whenever you want will be very inspiring)
If you are a smaller business and do your own data entry – then discipline yourself to summaries your expenses into the same P&L format each month/quarter –
 
In conclusion – your P&L is not locked in stone; it should evolve as your needs change!
Programs allow easy re-organisation of the general ledger from time to time and it is simple enough to add and delete rows in excel if that is all you have.
 
How can your P&L serve you better?
Email us, or join our conversations…