The Profit & Loss (P&L) Statement: Your business has a Secret PAL!
A Profit & Loss (P&L) Statement is a financial report or document which can be relatively simple or very complex, almost like another language. Whether or not you look at the Profit & Loss (P&L) Statement on a monthly, quarterly or annual basis, your business responds to every number, every day. Even if you don’t generate a P&L, it exists and your business gets friendly with it. The P&L becomes a buddy, a pal, to your business. The two of them rattle numbers around, make noise, and try to get your attention!
Does your business listen to its Profit & Loss (P&L) Statement, it’s pal?
You bet it does! Your business is shoving money around from one pile to another (theoretically, of course) because the pal may be warning your business that there isn’t enough money in one place, so they tag-team and grab money from another pile. Since you haven’t been in the conversation, you’re kind of surprised when you sit down to pay bills and discover there’s barely enough.
Maybe you make a decision to advertise more aggressively and actually generate more sales. Next month you sit down to pay bills and, sure enough, there’s more money! The only problem, there’s still barely enough money to pay the bills.
What just happened? You don’t know what’s going on. That’s what just happened. Your business and it’s pal have buddied-up and tossed numbers around, and you spending more and bringing more in didn’t accomplish anything.
But sales went up! Sure, your advertising was really great, but the problem wasn’t that your business wasn’t selling enough. The answers were right there in the numbers, and your P&L was trying desperately to get your attention. An analysis of the P&L would have provided insight as to why selling more product, without making other adjustments, would never change the direction of your business.
5 important reasons to read your Profit & Loss (P&L) Statement:
Another blogger made a list of the five most important reasons to read and understand your P&L. I think they’re all valid, except they’re backward. If you have your own list, and your P&L isn’t listed first as being your guide, you’ve probably already discovered that the four reasons for understanding your Profit & Loss (P&L) Statement have caused you more than a few problems. Here’s my list:
- The profit and loss statement is your guide for business decision-making. Without a P&L that you actually read and understand, you’re just fumbling around blindly.
- An accurate P&L is essential for determining your business’s tax liability.
- You will need a Profit & Loss (P&L) Statement for the bank if you want to get a loan.
- You may be required by law or other memberships to keep a P&L and submit with various licenses, audits and reporting.
- TAXES, again…an accurate P&L is essential for determining your business’s tax liability.
The bottom line.
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This Evergreen article updated February 2018