6 Ways Profit & Loss Statements Help Small Businesses Succeed
The most obvious benefit of your monthly P&L statement is that it shows whether you made more money than you spent — in other words, your net income (or loss). But that’s just the beginning.
Here are 6 more ways to use that accounting report to keep your business on track for success.
1. Check up on company expenses.
Like most accountants, we believe that operating and administrative expenses should not be more than 20% of gross revenues. To find your percentage, subtract expenses (not including cost of goods or sales) from revenues, then divide that amount by revenues.
Example:
Step 1. $100,000 gross revenues – $80,000 expenses = $20,000 difference
Step 2. $20,000 difference ÷ $100,000 gross revenues = 0.2 (20%)
If your percentage is too high, you’ll need to look closely at every line in your expenses column, from advertising to utilities, for cost-cutting opportunities.
2. Analyze the cost of goods or sales (COGS).
Many business experts say that COGS should not be more than 75% of your gross revenues. With both cost of goods and gross revenues shown on your P&L statement, this percentage is easy to calculate.
If it’s more than 75%, the next step is to do something about it. Look for ways to reduce COGS by cutting production costs, finding better prices on supplies, and so on. Conversely, consider increasing gross sales, perhaps by raising prices.
3. Prepare for tax season.
By regularly updating your P&L statements, you’ll also be keeping your books current. Everything will be ready to prepare your return, and you’ll spare yourself the giant headache of trying to catch up on months’ worth of backlog all at once.
4. See how much you can reinvest in the business.
Is it the right time to move to a larger facility, add more staff, expand your product offerings? The answers are right there in your bookkeeping reports, such as the profit and loss statement.
5. Prove you’re a success.
When the day comes that you need a business loan, a new investor, or a buyer for your business, your P&L statements will be a valuable negotiating tool. They provide concrete, chronological record of exactly how well the business has done since its beginning.
6. Compare yourself to your industry standard.
Two important ratios show how you stack up against your competitors.
Gross Profit Ratio reveals how much income your business generates on sales. A high ratio means you have a healthy profit margin, and won’t be wiped out by unexpected increases in expenses.
- The formula: Gross revenues – COGS ÷ gross revenues = GPR
Return on Equity measures how much investors have gotten back from what they put into your company, and is a good predictor of future returns for anyone thinking of investing in you.
- The formula: Net income ÷ shareholder’s equity = ROE
As you can see, the profit & loss statement is essential to making informed, timely decisions. That’s why Xendoo guarantees delivery of P&L statements to our clients on the 5th business day of every month. It’s all part of our real-time bookkeeping service that moves at the speed of business and lets you get back to doing the work you love.
