About This Episode
Regardless of whether you are a salon owner, a landscaper or an online business owner, there’s one report that you should run regularly to know your numbers. Knowing your numbers means knowing exactly how much money you’re making, spending, your profit and knowing how to use that information to assess the financial health of your business.
So what’s the most important report for your business finances? Your Profit & Loss Report, or your Profit & Loss report. You might be familiar with a Profit & Loss report and run the report for your taxes but it can also help you understand the financial health of your business.
It’s time you know your numbers!
What we’re talking about:
- What’s A Profit & Loss Report?
- How Do You Use The Numbers In Your Profit & Loss report?
- How Your Profit & Loss report Helps You Make Decisions in Your Business
What’s a Profit & Loss Report?
- A Profit & Loss report shows you…
- How much money you’ve made
- How much money you’ve spent on your cost of goods
- How much you’ve spent on operating expenses
- How much money you’ve made in profit
There are three sections of a Profit & Loss Report.
Income: This shows you your total income over a period of time which can be broken up by revenue stream. It’s helpful if you’re generating revenue through various income streams (like consulting, digital products, and physical products) so you can how you’re making money.
You can view your revenue on a macro level, which is the grand total, or you can view is on a micro-level, which includes the details of what income streams make up your total revenue.
Cost of goods sold: Like the income section, this can also be broken down by different types of costs, such as raw materials and labor.
Expenses: This shows you all of your operating expenses by expense category and the grand total. Often, your expense categories are the same as your tax deductions category, so this part of the report is helpful when filing your taxes.
The final line of a Profit & Loss report is the net operating income or your profit. If this number is positive, then you’ve made more money than you’ve spent. If this number is negative, then you’ve spent more than you’ve earned.
How Do You Use The Numbers In Your Profit & Loss Report?
You can compare the numbers in your Profit & Loss report to previous periods (like months or quarters). By comparing the numbers month to month or quarter to quarter, you’ll understand where you are at financially, and more importantly, why you’re there. For example, maybe you made more money this month (hooray!). But do you know why?
A year to date report helps you see what income categories are generating the most revenue and what percentage of your income comes from which category. It’s also a great way to see if one revenue stream earns more than others.
This also applies to your costs and expenses. You should use this report to understand where you’re making your money, spending your money and if it’s aligned with your goals.
You can also use your Profit & Loss report to track the return on your investments, such as advertising, and see if they paid off. If you spend money on ads one month, are you seeing a return on those ads over the next few months? You can watch your revenue numbers to find out.
How Your Profit & Loss report Helps You Make Decisions in Your Business
You can run your Profit & Loss report on a year to date basis and break the entire year into months. By doing this, you get an overview of the ebbs and flows of your income and expenses in your business.
If you have seasonal ebbs and flows in your business, then you can make better business and personal decisions. Instead of implementing something on a whim, you’ll analyze your numbers to ensure certain decisions work for you.
Have you run your profit & loss report lately?
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