Information that helps you manage
We begin a series with this month’s column in which we are going to examine documents that are very important to your business. Most likely, there will be very little for you to disagree with; you will find the information to be correct and in the case of some readers there will be a need to make a commitment to making more of an effort to give attention to each of them.
To give this series a bit of controversy, we are going to cover the three documents in a special sequence – from the least important document in this issue to most important document in the last issue. That is where the opportunity to disagree comes in; you may decide not all three are necessary for your business; you may want to rearrange the sequence. The purpose of the three articles is to get you to take a look at the information you could be utilizing to manage your business each month.
The three documents are your profit and loss statement, the balance sheet, and a projectionary cashflow statement. We are going to examine the profit and loss statement first as we have assigned it to be the least important.
What? A profit and loss statement is unimportant? No; just the least important of the three. It takes the position of least because it is but a temporary document. It may be a monthly statement or the year end statement, but it is definitely temporary.
The summation of the profit and loss statement is that it tells you about a specific period of time in the past. The only thing you do with the information from a profit and loss statement is learn from both the good and bad aspects. If you learn, you can make changes in your business so that future monthly and annual profit and loss statements are better than the one you are currently looking at.
The analysis of a profit and loss statement can be performed in a few easy steps. The first is likely to be a comparison of sales to a similar period of time from the previous year. Differences from the previous year are often credited or blamed on economic conditions, the weather, or factors you have observed for months and years.
The second item to be examined is usually the gross margin. When there is a sizable variation from a previous profit and loss statement, it is often believed to be because of the variety of products and services sold. To improve either of these, you will likely need to make a commitment to make some changes in the way you market your business. The next number on the profit and loss statement is the gross profit dollars and from that amount you pay all of your operating expenses.
Comparing an operating expense on the current profit and loss statement to that previous month or year undoubtedly shows you line items where you have saved money or could save money. With each of these, it is a much simpler process of making a change. Adjusting a thermostat, changing the hours of your staff, and buying a few less office supplies are examples of how you can more immediately affect the profit and loss statement.
Month to month, and year to year, you receive a profit and loss statement that gives you a picture of what has most recently happened to your business. With each of the statements, you have the opportunity to compare that statement to a similar period of time that is even further in the past. With that information you can see what you have done well that you will work to maintain or improve even further.
With the shortcomings, you see where you need to improve your business so that the bottom line, the net profit, is worthy of the time and investment you have made in your business. The profit and loss statement, in the opinion of this writer, qualifies as the least important of the three documents because it is purely historical and because it covers such a brief period of time.
With the next issue, we will have either the balance sheet or projectionary cashflow statement left to consider as we move from least important to most important financial documents.