P&L Management begins with understanding your financial statements, including the P&L statement. Most small business owners are pretty familiar with the P&L because it is required for bank loans and other financial transactions. The P&L clearly shows the profit and loss created by the business.
Understanding income statements and balance sheets are necessary to run a successful small business. Financial statements refer to your income statement (also referred to as your profit and loss or P&L), balance sheet, and cash flow statement. Financial statements allow you to understand a critical part of your business’s performance.
What is a Profit and Loss Statement?
Investopedia defines the P&L Statement as “a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. P&L statements are often presented on a cash or accrual basis. Company managers and investors use P&L statements to analyze a company’.”
The profit and loss statement for small businesses is an excellent way to:
• Track revenue
• Manage expenses
• Monitor cost of goods
• Control overhead expenses
• Forecast for future expenses
• Determine operating income
Your P&L is one of three financial statements that provide a complete and clear picture of your financial health. The P&L should accompany your balance sheet and cash flow and can be run monthly, quarterly, or annually.
What is an Income Statement?
A P&L statement is often referred to as an income statement. An income statement is the one financial statement that most small business owners understand. It provides a view of how much the business has made and how much the company has spent within a specific time frame. In its most basic format, the income statement compares your revenue and expenses to determine how much money you have made or lost.
What is P&L Management?
P&L management is the way your business handles profit and loss. Managing P&L creates an environment where you strive to increase revenue and decrease expenses. A P&L statement provides insight into the company’s cash flow and shows where money is coming from and how it is used. To stay profitable, managing the P&L can help to cut business expenses where needed. If you do not maintain and review your P&L statement, over time, you could develop expenses that exceed revenue, and you may have to deal with small business bankruptcy.
It is not difficult to create and compare P&L statements month to month or for any other period. Many accounting programs can generate a P&L, and a bookkeeper can be a precious resource. An experienced bookkeeper can create a P&L quickly and provide insight into the P&L management process.
Making changes to business finances is a valuable result of P&L Management. Understanding your finances allows you to make educated decisions:
• Can we afford a new copier?
• How effective is the new salesperson with onboarding profitable customers?
• Can we source our materials better to decrease the cost of goods?
Depending on the size of your business, you may need to meet with an accountant in addition to your bookkeeper and CFO. CFOs can be part-time or fractional. A fractional CFO is a part-time CFO for small businesses (SMBs) and nonprofit organizations, often contracted in an outsourced capacity. Outsourcing a fractional CFO is a way to engage a CFO without the burden of hiring. It allows small businesses and nonprofits to access expertise and a financial skillset they might not otherwise be able to afford.
The Importance of P&L Management
Managing profit and loss involves creating profit and loss statements to analyze your business’s overall revenue and expenses. The P&L statement gives you crucial information about where to cut costs, increase revenue, and determine whether your business is profitable or not.
The bottom line? Strategize, do not react. The P&L and other financial reports that are reviewed monthly can provide an understanding of your business’s financial future. It can deliver insight and afford you time to forecast or re-forecast financial plans. Working with financial statements presents an accurate and clear picture of the company’s economic well-being. From here, you can make decisions and monitor the effectiveness of those decisions closely to determine the impact on the business.
I understand a little better, but I don’t think I can manage the P&L myself.
You do not have to! We can help. We want you to be successful, and we know what it takes. Understanding bookkeeping and financial tasks require both time and knowledge. Capital CFO+ will do the bookkeeping and provide the necessary CFO Services for your business. Contact us, and you can return to spending time building your business!
Resources: Business.org, Investopedia
