What do you do when you get your Profit & Loss Statement (P&L) from your accountant, or when you print one from your accounting software? Do you ignore it, or look at the total income and the bottom line net income and then toss it in a drawer or file folder without analyzing it? If that’s the case, then you are missing out on some potential opportunities to increase your sales and your profits.
Smart money management practices include staying in control of how your company’s income is being used and to make adjustments that are in the company’s best financial interest. There are many ways to analyze your P&L to identify some lost income opportunities; here are just a few.
1 – Pull last month’s P&L statement so you can compare it with the current month’s statement.
2 – Compare the Total Income figures and the bottom line Net Income figures. Whether you are up or down compared to the previous month, you can use the rest of the report to figure out why that may be the case. Financial management is easier when you do some analysis.
Cost of Goods Sold: Look at your cost of goods sold to see if your inventory was replenished fully or you were out of stock on some items that you could have sold.
Investigate whether the costs have gone up and you need to pass on the cost increases. You can lose sales by being out of stock as well as not passing on price increases from your suppliers. This would eliminate the strange sensation that you may have experienced when you are ‘selling more’ but ‘making less’. And you think, “What the heck is going on here?” So be sure to look this over with a critical eye.
If your suppliers have raised prices, you should increase your pricing structure on the products you are selling. This ensures the sales you make have an adequate profit margin built into them. Sometimes suppliers raise their costs and forget to inform you, or the announcement gets lost before it reaches your in-box, and you don’t notice the increase right away. For example, some express parcel shippers tacked on a $20 fuel surcharge increase when gasoline prices surged to over $4 a gallon. They did this because their prices increased, so they had to pass them on to you – their customer.
Tip: Get all of your suppliers to fax you their latest price sheets and compare these figures to the costs you have for the items in your accounting system. Then decide if you should raise your prices to pass any increased costs on to your customers.
Tip: It’s better to increase your prices a bit by bit over time, rather than increase them by a large amount all at once. Notice how a well -known coffee shop raises its prices for coffee a nickel or a dime every 3 – 4 months and customers keep right on buying.
Advertising & Promotion: The first expense item(s) to look at are your marketing expenses. Did you cut back or increase promotion? Did you change your promotion and is working better or perhaps not working as well? Too many businesses cut back on promotion funding in tough times. That’s a big mistake. Deciding to cut back on talking to your current and potential customers can cause them to forget your company and to shop at your competitor who is still promoting. Consumers have not stopped buying, they are just being more selective about what they buy and where they shop.
Other Expenses Lines: Compare each expense line to the matching expense from the previous month. Are expenses creeping up without you realizing it? If so you can decide where to cut back. Did previous cost cutting measures help the bottom line profit? If so, congratulate yourself.
Balance Sheet Items: If the bottom line Net Income is up, but you don’t have that cash sitting in a bank account where you can see it, it usually means that you paid out the profits to principal owed on debt. Your balance sheet shows you the credit debt (liabilities) you owe and paying those is not deductible except for the finance charges or interest.
For more of these business profit tips, check out our downloadable e-book Business Checklist to Increase Profits. This checklist is the shortcut to an MBA on money management to generate more profits. It costs a lot less that an MBA degree, and it’s easier to understand!
What have you learned from your P&L statement? Share it with our readers by submitting a comment.