Business | Negocios
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Reviewing Your Profits and Losses for the Year
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March/Marzo 09, 2014
hile Tax Season is a stressful time of year for business owners, it is also a great opportunity. Now is a fantastic time to study your Profit & Loss statement from last year and build a strong financial strategy. Looking over your P&L’s is not only a concrete way to measure your business’ revenues, costs and expenses over a specific period of time, but it provides valuable insight into the ever-important question that separates the sinking businesses from the swimming ones: how your company can generate profit by increasing revenue and cutting costs. In other words, reviewing your P&L’s is essential to keeping your business in tip-top shape. However, P&L’s are not the most straight forward and easy-to- understand documents. Reviewing them can sometimes cause confusion in even the most experienced business owner. Learning to read and use the information in your P&L statement helps to keep your business not only operational but successful. Here are a few things to keep in mind to help make the next time you sit down with your P&L’s more productive. HOW TO ANALYZE YOUR P&L’S Obtain a P&L statement from the past year, quarter or month. In this case the time span matters only in so much as it matters with all assessments: the greater the frequency of the assessment, the greater the opportunity to make revisions and improve. Then review the amounts on the statement. The bottom line (figuratively and literally) explains how much your business gained or lost. Positive numbers indicate profit, negative amounts indicate a loss. Once you have found out whether the organization made a profit or a loss,
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take a closer look at the revenues and expenses and how they occurred. Did the company make money through standard operations or does the one- time sale of a fixed asset stand out? Also consider the effect depreciation had on your P&L statement. Depreciation is the reduction in the value of an asset over time, and can result in a loss without necessarily reflecting a payment. Finally, most business owners use the data on their P&L statements to figure out their company’s profit margin ratio. To determine this ratio, simply divide the net income before taxes by the total sales amount. This quotient will tell you the rate of profit your company earned for every sales dollar received. When you compare the ratio from your most recent P&L statement to previous profit margin ratios, you can confidently verify whether the company is moving in the right direction or not. WHAT ELSE CAN YOU DO WITH THE NUMBERS? P&L’s operate as a kind of guide post when you are planning your company’s future. As such, many business clients bring us their Financial Reports and ask, “Show me where I can run things better in my business?” Interestingly enough, most of the time my answer is not about accounting, expenses or taxes, but performance. Too often, business owners spend their time on how to save a dollar when spending the Same amount of time and effort on sales and marketing would drastically improve their financial ratios and give them more funds for business development. In the end, know your industry ratios, compare them to your finances and you can start determining the real value hidden in your financial statements!