Does Your Profit and Loss Statement Make You Go Cross-eyed?

Oct 17, 2018 | Anne's Blog

I want to talk today about your profit and loss statement. (Oh crap, did I lose you already? I hope not.) First of all, financial statements were not designed to be the bane of your, the business owner’s existence. They really weren’t. And if that’s what it feels like when you look at one, then maybe something’s amiss. Your financial statements should provide you with actionable information so that you can run your business better.

If somebody besides you looked at your Profit and Loss Statement, could they tell what your business is about? Could they tell what the costs of your products or services are? In other words, does your Profit and Loss Statement provide you with truly actionable information, or is it more just a data collector that gets shoveled off to the tax accountant at the end of the year? Are you familiar with the abbreviation GIGO? It stands for garbage in, garbage out and is applicable when something like a Profit and Loss Statement is totally incomprehensible.

I know how for small business owners who know their subject matter but not necessarily business fundamentals, it can be easy and seem, at the time, sensible to set up their accounting program (say, Quickbooks) to kind of sort of add things in as they go. What do I mean by that? When they make a sale of something, whatever it is, into Quickbooks goes a whole new item with whatever name springs to mind at the time. Seems to make sense at the time. Graphic design, web page, one color page, discount, ecommerce set up, SSL certificate, and more. Over time the list of revenue items just keeps growing and at the same time losing any sense of “what really am I selling?”. Expenses get added in the same meandering way until the profit and loss statement is many pages long and basically incomprehensible.

At this point, it’s not possible to tell how much a particular service is costing the business, or accurately determine what the business breakeven point is without jumping through more hoops than in a circus.

Hoop jumping should be left at the circus. You, the business owner, have too much on your plate without looking at a P&L Statement that seems like gobbledygook. It’s not okay.

What if you were to think of your Profit and Loss Statement as your ‘elevator pitch’. You know… the 30 to 60 second spiel you can reel off in your sleep about what your business does. What it delivers. If there are discrete products and services, they will lead the way. The actual products or services —- not how they are delivered. If you have five different products that are delivered six different ways, there’s nothing wrong with that. The point is to arrange the P&L so analysis can be accomplished by product/service. So you can determine the profitability of your products/services easily.

This suggests also that it makes sense to organize the Cost of Goods or Cost of Sales section of the P&L to mirror the revenue section. Track stuff by product/service. Again, the point here folks is to get you actionable information, not send you running to the bottle of ibuprofen to quell the headache that pops up when you realize you can’t make heads or tails of the data in the statement.

And before rushing to blame the bookkeeper, take a breath. Your bookkeeper is following your direction and if you aren’t providing any, well… This is not to say from a straight bookkeeping/accounting perspective that you need to be versed in that. They do. The guidance you are responsible for providing is more strategic. Bigger picture. What category names and groupings make most sense for running the business?

Look at the Before and After in the Revenue portion of Grinch Graphic Arts, Inc. Which makes more sense to you?

So think about how you can clean up your own P&L so that it provides real information for you. Make it the tool you can really use. If you’d like an outside set of eyes on yours to get it there faster, please reach out and we can get a call on the schedule to see how we can help.