How to Leverage the Profit and Loss Statement

The profit and loss statement has a number of important uses for businesses of all sizes. But many small business owners are guilty of underutilizing their profit and loss information. They double check the income statement to see what business bookkeeping can tell them about whether or not their perception of the business is accurate, and then ignore it until the next time they think to print and check it. But this essential accounting tool can do many other things for a small business when used correctly.

The biggest point that financial experts make is that a P&L is not the same thing as a cash flow statement. Trying to run a business without both is like walking in the dark. You have no idea where you're going or even what you've just passed. You need to manage profit and loss as separate from cash flow so you can keep track of income and expenses when they are incurred and earned, not just paid, so you have a clearer idea of exactly how the business is doing week to week and month to month. The biggest mistake small businesses make is keeping inaccurate books that ignore this distinction, which leads to suboptimal decisions.

The second thing you need to do is use the P&L to understand what is and isn't succeeding with your business. It's easy enough to look at the bottom line, decide if it is or isn't where you want it to be, and maybe circle the biggest expense for further attention. But if one doesn't examine the details and breaking them down by time period to see which expenses are over- or underperforming vis-à-vis their intended income effect, it's impossible to get the most valuable information out of the statement.

The other common mistake is to only use profit and loss information for backward-looking evaluations. After a few months, the data in a P&L statement is sufficient for conservative projections at least a few months into the future. Expenses aren't static, so having some idea of your financial position in three months makes it easier to decide when is the right time to invest in that new piece of capital you need for your business. Without projections, that choice is just a guess or a random gamble.

There's a reason the Profit and Loss statement is one of the most essential and highly-valued financial documents for accountants and businesses of all sizes; it provides clear, powerful, relevant information when used correctly. If you're underutilizing your accounting information, you should consider looking more deeply into your P&L statement.


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The Profit and Loss Statement Is an Essential Accounting Tool. But It Is Only Useful If You Know How to Interpret and Apply It. Learn More about P&L at http://www.outright.com


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