What is a profit and loss statement? Here are three key areas you should analyze to better understand your small business operations from HoneyBook Pro and CPA, Dondrea Owens
Analyzing your financial reports is an absolute must if you’re taking the time to do your small business bookkeeping every month. Reports and financial statements—such as a profit and loss statement—help you make better decisions and have greater profitability as a business owner.
The questions I hear most are:
- Which financial reports should I analyze?
- What exactly am I looking for in these reports?
- What difference will it make in my business?
Well, I’ve got answers. Let’s get into it!
Use our free profit & loss template to track revenue and expenses.
What a profit and loss statement shows about your business
Overall, a P&L statement will show a company its revenues and expenses and profit and loss over a specific period of time. It’s also called an income statement, and it’s one of the three major financial statements that you should incorporate into your bookkeeping, along with a balance sheet and cash flow statement.
I recommend reviewing your P&L statement every month to better understand your business. Once you’re more comfortable or have more robust bookkeeping and accounting, you can review the report every quarter or even annually.
Inside the report, you’ll be able to see your total income for the given period of time, your cost of goods sold which yields your gross profit, and your total expenses, which leaves you with your net profit or loss.
The three basic areas you should be analyzing on your profit & loss statement every single month are:
- Income sources
- Operating expenses by category
- Profit margin
1. Income sources on your profit & loss statement
As you look at all the income sources in your P&L statement, ask yourself:
1. Which offer generated the most amount of sales?
2. Which offer generated the least amount of sales?
3. Was my target sales goal met? Why or why not?
Figuring out which offer generated the most amount of sales can help you determine if a particular service offer might appeal more to your audience. Armed with that information, you can tailor your marketing efforts to target more of that audience and increase sales.
On the flip side, knowing which offer generated the least amount of sales can help you determine if it’s time to ramp up your marketing efforts to sell more or if it may be time to discontinue the offer altogether.
Most business owners set an annual sales goal; however, setting monthly checkpoints for that goal is crucial to tracking progress and eliminating year-end surprises.
Determining why or why not could produce valuable insight you can use when setting future goals—things such as a slow or busy season, increased competition, unexpected downtime, etc.
2. Operating expenses
When looking at your income and expenses, here are some questions to ask about how you’re spending your money:
1. What are the top three operating expenses?
2. What percentage of operating expenses went toward marketing expenses?
Your top three operating expenses should be ones that help you create, sell, or deliver your offer to clients/customers. If they don’t, evaluate just how necessary they are and how you can reduce or eliminate them.
A potential area for overspending is marketing expenses. Your general marketing budget should be around 5%, with a max of 10% during periods of extreme visibility and growth. If marketing expenses consistently go beyond 10%, your business could experience slower profit growth (thus, decreased financial sustainability) even when your sales are booming.
3. Profit margin
Your profit margin takes your revenues and expenses into consideration. A healthy profit margin is when your revenue outweighs all your costs. Your operating profit is what you have when you subtract operating expenses from your gross profit.
Ask yourself these questions to better understand your profit margin:
1. What is the profit margin percentage?
2. How can I make more sales?
3. Where can I streamline expenses?
To find your profit margin percentage, take total profit and divide it by total sales.
A good profit margin is 70%. If you’re already at 70% or better, great! You have opportunities to spend and generate even more sales—think, outsourcing. Or, save!
If you’ve not hit a 70% profit margin, think of free ways to get in front of people who need your offer. Also, consider how you can streamline your expenses and maintain or improve your level of service—think, business automation.
Uplevel your bookkeeping and accounting
Paying attention to these three basic areas is a great place to begin analyzing your profit & loss statement, but your business’s financial health doesn’t stop there.
Make sure you’re using a CRM for small businesses like HoneyBook, which lets you track all of your client payments and expenses. Inside HoneyBook, you can view your profit and loss statement with more information about your lead sources, operating and expenses, and more. You can even sync with Quickbooks for the most robust bookkeeping and accounting.