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Why a Profit and Loss Report?

Updated: Jul 15, 2020

During this time of isolation and social distancing, there are many uncertainties in business, but there’s one thing I implore you to do - take this opportunity in isolation to learn to understand your business.

For Business Owners, there are many important documents to learn and read. One of the most important is the Profit and Loss statement, known as the P&L, and the balance sheet”

- Darren L. Johnson

A Profit and Loss statement summarises your financial position and progress during a selected period. Without the P&L, there is no way to determine how your business is tracking and whether you are losing money or making money.

During this crisis, it’s important to look at your fixed costs, which may include:

  • Rent

  • Wages

  • Utilities

How can you reduce these costs? Now is the time to look over your fixed costs and find ways to decrease expenses, particularly as sales are perhaps less than usual, or even non-existent.

Tips for Reducing Costs

A quick and easy thing you can do to take control of your costs is to shop around. If rent is too high, see if you can strike a deal with your landlord, or opt to downsize to cheaper premises. Consider talking to your landlord to renegotiate new terms for this period, and touch base with your utilities providers too. Most electrical, gas and telephone/internet providers would rather keep you as a customer at a reduced rate than lose your business altogether. Look around for cheaper alternatives and talk to your current providers about whether they will match or even beat competitor’s prices.

In terms of wages, review tasks to be completed and determine any jobs that might be better outsourced. Look at outsourcing to contractors and hiring virtual assistants on an ad hoc basis rather than being locked in to any long-term arrangements. Hiring freelancers is often cheaper than full time staff, and gives you the added bonus of flexibility during uncertain periods.

In all your expenses, be sure to explore all avenues to receive the best financial outcome for your business. Reviewing your P&L regularly will ensure you know where money is being lost, so you can then formulate a plan that ensures your business comes out on top. Work with a bookkeeper who can best provide you all the information on a financial system if you don’t already have one.

Understanding your Break-Even

More than ever, now is a crucial time to revisit your Break-Even. Break-Even is an important business tool of any good business, which helps determine the cost structures and the number of units that need to be sold in order cover the costs or make a profit.

Break-Even Analyses are often used when starting a new business or launching a new product, however, with current isolation and social distancing restrictions in place, it’s likely that your business model has somewhat changed. Understanding your Break-Even alongside your P&L report will help you understand where your business currently stands, and what plans may need to be put in place during the pandemic.

What is your break- even? See your Accountant if you are not sure!

Use your Reports to benefit your business

Reviewing Profit and Loss Reports regularly ensures you’re keeping your business viable. By taking the time to really get to the bottom of your finances during this time, you can come out of isolation in a better position than you would otherwise, not only keeping your business afloat during the crisis, but also better understanding how your business might best operate in the long-run.

Have you found ways to cut costs and increase profit during the current crisis?

Let me know how you’re going, and if you’ll be using these tips to review your own business!

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