Many small businesses, amidst the hustle of daily operations and the focus on customer satisfaction, often overlook a critical component of their financial health: the analysis of their Profit and Loss (P&L) statement. This oversight can mask underlying issues and opportunities, hindering strategic decision-making and growth.
Understanding your P&L is crucial for the financial health of your business. It not only shows your revenues and expenses over a specific period but also highlights areas for potential savings and growth. Follow this checklist to navigate your P&L statement effectively.
Step 1: Collect Your Data
Ensure accuracy: Before you begin, make sure all your financial transactions are recorded accurately in your accounting software or ledger. A tool like QuickBooks or Xero is immensely helpful here, but at a minimum a Google Sheet or Excel works!
This is the most important step, if you need help with this read our last blog post on how to choose the right bookkeeper.
Step 2: Understand Your Revenue
Total Revenue: Start by looking at your total revenue. This includes all income from sales, services, and any other business activities. Remember - not all revenue is in your POS so while that is a good place to start you may need to look at your accounting system for the full picture.
Analyze Revenue Streams: Break down your revenue by categories (e.g., food sales, beverage sales, merchandise, third party sales).
Compare Period over Period and YOY: Once you have analyzed your revenue for this period see if this is an increase or decrease both from the previous period and from this period last year.
Step 3: Examine Your Expenses
Fixed vs. Variable Costs: Separate your expenses into fixed costs (rent, salaries, utilities) and variable costs (inventory, marketing). This classification helps in understanding costs you can control versus those you can't. Most accounting systems will automatically do this for you!
Look for Trends: Analyze how your expenses have changed over time. Identify any patterns or unexpected increases in costs.
Step 4: Analyze Gross Profit
Calculate Gross Profit: Subtract the cost of goods sold (COGS) from your total revenue. This figure indicates the efficiency of your production and pricing.
Benchmark Against Industry Standards: Compare your gross profit margin to industry averages to see where you stand. Not sure how to do this? Use ChatGPT as a starting point (reach out to us for a prompt you can use).
Step 5: Dive Into Net Profit
Determine Net Profit: Subtract all operating expenses from your gross profit. This includes expenses like rent, payroll, and marketing.
Understand Your Bottom Line: Net profit reveals the overall profitability of your business. A low net profit margin might indicate high operating costs or low sales efficiency.
Compare to prior periods: Remember running a business is a marathon not a sprint. Your goal should be to get slightly better period over period.
Step 6: Consider Non-Operating Items
Account for Extraordinary Items: Include any non-recurring incomes or expenses, like the sale of an asset or loss from a natural disaster.
Adjust for Taxes: Make sure to factor in taxes to get a clear picture of your actual profit.
Step 7: Take Action
Identify Opportunities for Improvement: Look for areas to reduce costs, increase revenue, or improve margins.
Set Achievable Goals: Based on your analysis, set realistic targets for revenue growth and cost reduction.
Step 8: Plan for the Future
Forecast: Use your P&L analysis to forecast future earnings and budget accordingly.
Regular Reviews: Make P&L analysis a regular part of your business routine to stay on top of your financial health.
Regularly analyzing your P&L statement empowers you to make informed decisions, leading to improved profitability and business growth. Remember, the goal is not just to look at the numbers but to understand the story they tell about your business.
If you have any questions please reach out to us! If you want steps 2-8 automated for you sign up for a demo of Starfish today!
Bonus, if you use QuickBooks here are some top reports to leverage:
Profit and Loss
Profit and Loss by Month
Profit and Loss Comparison
Profit and Loss as % of total income
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