The goal of any business or company is to become and maintain a level of profitability. Many businesses today begin in the red due to start-up costs, asset purchases, etc., but eventually, make it into the black. Each business is different, whether it be a service-based business or a product based business, knowing the costs of running each business is a must.
For those of you who have been in business know the term profit and loss statements, or P&L statements for short. This statement simply takes your businesses products or services and then calculates what you are generating a profit on and what you are generating a loss on. Generating this statement allows you to gain a quick insight into what is happening within your business.
Short-Term Benefits
It should be a part of your monthly procedures to generate a profit and loss statement. First, it will give you an estimate of how your products or services are selling. You may find out that widget X is selling at a loss, but that loss is converting into more product sales, generating a net positive. Conversely, you may find widget X is selling at a profit and this may spark more marketing towards that product. There are several methodologies to reviewing a P&L statement, but nevertheless, it will guide where you should be allocating efforts.
Another short-term benefit is if there is a product that is hemorrhaging money, you can quickly research the raw cost to produce that product or simply remove it from the market place. Knowing what items are selling or which ones are sitting can help you optimize your business product offerings to better suite your audience.
Long-Term Benefits
By generating regular P&L statements, you can begin to determine trends within your business structure or the marketplace. For example, you may find widget X sells poorly in the summer months for a loss, but during the winter months, it excels and generates profits. Knowing this data can allow you to tweak products throughout the year to limit risky exposure.
Other long-term benefits include the overall health of your business. Catching a problem early will give you enough time to react. On the other hand, if you see a product is beginning to take off, you can deploy the correct resources to sustain the positive momentum. The key, however, is not to become reactionary, but rather observant and put the appropriate plans in place.
Each accounting system has unique features in generating a profit and loss statement. Regardless, your company will benefit by having this generated at least on a monthly basis. Depending on your situation, you may find a weekly report is beneficial as well. Taking the data and constructing models and forecasts will propel your business to the next level. No matter how large or how small, implementing this report into your monthly analysis will shed light on important aspects of your company.