The Profit & Loss Statement is a very critical tool to assess the financial success of a business. However, for small businesses the statements are usually set up to prepare a tax return. In many cases the expenses are in alphabetical order. Isn’t that how QuickBooks has created it?
IT CAN BE MORE! Here’s a few ideas…
First: Create a one-page, high level, comparative profit and loss statement. Keep it simple – Sales less Cost of Sales/Direct costs less Overhead equals Operating net income. It is easier to read and can point out problem areas quickly.
Second: Design it to answer the following questions.
- Where is the income coming from? Break sales down so you can identify your sales mix. Certain sales deliver a better financial result.
- How much gross profit or margin is the business generating to cover overhead? Monitor the gross margin percentage. Compare it to industry standards or to the previous periods. Look for trends.
- What is the monthly overhead? There are expenses that are paid every month. It doesn’t matter how much in sales or if there are sales. Expenses such as rent, utilities, technology costs, etc. Compare each month and see how they are changing.
- What is the Operating Net income? Consider removing depreciation, amortization and interest from normal expenses. These are management decisions and can swing the net income dramatically without telling management anything about how financially successful the operations are.
Third: Group expenses by how you make decisions.
- Cost of good sold or Direct Costs. These are costs that can be traced directly to a sale. If you didn’t have the sale, you most likely won’t have the expense. How much are we getting to cover overhead?
- Staffing costs such as payroll taxes, health insurance, training and other benefits paid. Benefits usually account for 20% of wages. How does your business compare?
- Sales/ Marketing costs such as website, trade shows, leads, advertising, samples, etc. Review the expenses to evaluate the results you are receiving. Can you do better?
- Occupancy costs such as rent, real estate taxes, utilities, etc. When you are considering moving to a new location or going 100% remote this will tell management what the total costs are.
- General & Administrative costs which cover everything else. This includes tax preparation, insurance, telephone, office supplies, etc. It costs money to just operate a business. Be aware of your costs. Do we need these costs?
Take time to create a Profit & Loss that will provide the information you can use. From the one-page format, you can drill down to the specific details. You only need to drill down when you have a question. In my experience about 95% of the financial statements I review for small business owners are misleading or are not used in general. The more the financial statements are used and questioned, the more accurate and greater the tool becomes.
P.S. If you want to simplify your financials, give us call and set up a time. Mary can
work with you to design one and one of our QuickBooks advisors can make the changes.
Price range: $500 to $2,000.
By Mary Guldan-Lindstrom, CPA