Understanding Profit & Loss Statements

P&L Statements for the Self-Employed

There should be only one answer to the question, “Are you financially managing your business successfully and profitably?” It has to be, “Yes!” And to run a business profitably, to handle your taxes and other obligations properly, you must have accurate and up-to-date financial information; you cannot guess if you are making a profit or a loss.

A detailed P&L is a breakdown of income and expenditure over a 12-month period. This will show, monthly, exactly the amount you have sold and the type of products you have sold. It also lists exactly what you have spent to get your sales income, plus detailing your overhead and expenditures.

From this information, you will be able to see sales trends, such as whether sales were higher in one month and lower in another. You can then investigate the reasons for those differences — perhaps a holiday period, or hot or cold weather. Once you have the answers, you can direct your advertising and marketing to peak periods and reduce them when the sales are low. You can also devise promotional activities when times a good and even when they are bad, to improve sales.

Not convinced? I relay the following anecdote in my book, How to Succeed in Business by Really Trying!

“One company I worked with had sales of about $2 million, but with net profits of only a few thousand. When I looked at the company’s P&L in connection with its overall costing structure, I found it to not be based on any particular strategy or even related to the actual running costs of the company. Rather, charges to clients were based purely on guesswork and varied with the individual client. The largest customers were charged less, took the longest time to pay and always questioned every invoice. These clients got their invoices discounted because they played up the fact of being major national companies. Incidentally, the large customers also expected an immediate visit from a service technician when they called, often refusing to pay overtime for night and weekend call-outs. A classic case of spending 80% of the time on clients that generate 20% of the income.

I found that of the company’s $2 million in sales, $750,000 was coming from the larger customers who were abusing the company with payment terms. I suggested that by removing these customers, the company’s profits would increase substantially, and recommended substantially reducing the sales figures to make the business profitable. The business reduced its sales by 37.5%, which, combined with a few staffing changes, translated into a net profit in excess of $100,000!”

Victor Green, author of How to Succeed in Business by Really Trying, has a long record of founding and growing businesses in a variety of industries. Now retired, he lectures and mentors small business owners and new entrepreneurs in conjunction with SCORE and the US Small Business Administration.