5 ways to make perfect sense of your Profit & Loss statement
Let me start by sharing with you a true story: a recent discussion with one of our new Platinum members highlighted the lack of clarity with their Profit & Loss (P&L).
We were talking about margins on their materials and requested exact figures for the previous year – their revenue and their cost of sales for materials.
In asking for answers to these two questions the response was “I can’t provide that. I can only tell you cost of sales not revenue.” We discovered the revenue of labour and materials was captured as one total figure and not broken down into labour and materials as two separate lines.
What is the problem with this situation?
Without the materials being isolated as their own revenue line, we could not determine the true margin on materials. We had to go on face value that what both he and his team were charging was consistent for a set margin.
What is the solution to this issue?
We suggested every invoice be split to capture as individual values – one value for labour and a separate value as materials. Now the invoice for the customer could remain as one ‘total’ line (that was how they invoiced), however, for accounting purposes, one additional step was required from his team of tradesmen before the invoice was provided to the office.
The discipline of every invoice being returned to the office with a split value for both labour to materials has lead to more meaningful data being captured. This will result in better informed decisions as to the margins placed on materials – to agree that the current rate is acceptable or that changes are required.
How does this relate to your business?
Thoughtfully set-up Profit & Loss statements to produce meaningful data that will result in better-informed business decisions.
Here’s 5 ways to make perfect sense of yours:
1. Measure what’s important
Think about your specific trade and what data is important to measure performance. Can you clearly identify the income generated for a particular product/service? What about the related costs? For example, we have after Hours as a single revenue line to understand monthly data. With this current and historic data in hand we can make informed decisions about this specific service.
Have a good think about your trade and start capturing to enable to you to access, which products/services are worth your energy moving forward.
2. Use simple English
If you don’t understand a particular term or word then change it so that it means something to you. Don’t just accept the words that came with your accounting package or those defined by your accountant. They need to make sense to you.
If your accounting package has automatically generated account lines that you’re unlikely to use, get rid of them.
4. Be more specific
As your business grows, so does your revenue and expenses. Ensure you have catered for this growth by being more specific with your data capturing. For example, if you have a line called telecommunications which is a combination of telephone and mobile phones, then it may be best to split this in advance to ensure you are provided with single line items for each. Make the information more useful by being more specific.
5. Keep it up to date
Seems obvious but it is not uncommon to hear that P&Ls are two, even three months overdue. We cannot stress enough the importance of keeping your information up to date – how else are you to make better informed decisions? With increased clarity on your businesses numbers, you’ll be able to make the best decision in every situation. Empowered decisions.
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