Your profit and loss (P&L) statement — also known as an income statement — is a much more powerful tool than you may realize. It is one of those statements that your auditors and investors will request every year, but it can be so much more than a simple reporting tool if you know how to use it. When you perform the following tasks, your P&L can help you make better short-term decisions and improve the outcome of your long-term strategic plans.
Run Relevant Reports
Most accounting packages have “canned” reports or even customizable ones. Play around with your accounting software and see what reports you can run within your program. At a minimum, you will want to compare monthly, quarterly, and annual revenues and expenses. But if your software allows it, try running queries that are helpful to your industry or market. For example, a clothing retailer may see a spike in sales just before school starts, so they may want to compare third-quarter sales from year to year to see if they’re improving.
Customize to Pinpoint Strengths and Opportunities
A useful P&L begins with the chart of accounts. When setting up your trial balance, organize your accounts so you can isolate data in a manner that’s meaningful to manage your business, for example by cost center, business segment, location, or manager. These reports can pinpoint where your opportunities exist and highlight where business is booming. Once the chart of accounts is set, establish a change management function to evaluate and approve changes to account groupings in order to maintain year-to-year comparability.
Drill Down to See Detail
Most accounting software will let you make groups and subgroups of accounts that can be expanded or consolidated depending on the report you generate. If you notice a big swing from the prior period when looking at the consolidated P&L, drill down to the individual accounts to see where the change is coming from. For example, your consolidated account groupings may show labor costs as one large expense. If you can drill down to view employee costs separately from fees paid to third-party providers, such as contractors and temp agencies, you should be able to make better decisions about your workforce.
Calculate Performance Ratios
Looking at the raw numbers can be helpful, but performance ratios can provide another level of familiarity with your business. Performance ratios are often grouped into five categories:
- P&L focused
- Profitability ratios (e.g., profit margin)
- Operations ratios (e.g., inventory turnover)
- Market ratios (e.g., earnings per share)
- Balance Sheet focused
- Liquidity ratios (e.g., working capital)
- Leverage ratios (e.g., debt to equity)
Keeping an eye on performance ratios from year to year can help you see the relationships between accounts, not just the numbers themselves. Organize your P&L in such a way that you can quickly calculate the ratios most important to you.
Compare to Your Budget
If possible, create your budget within your accounting software and mirror your budget’s layout to your P&L. Doing so will let you quickly and easily compare budget to actual. When you run interim reports, most accounting software can convert your annual budget to the time period being reported. This will let you make comparisons in real time rather than waiting until the end of the year to tweak your strategy.
Use your P&L to forecast revenues, expenses, and net income. These projections will require you to make some assumptions, but with your historical performance at the ready, you can more accurately predict where you are headed in the future. Projections can also be used to run “what if” scenarios. What if you financed a new IT system? Hired another employee? Saw a downturn in the market? Refinanced your loans? Changed suppliers? These “what if” scenarios can be crucial when making strategic decisions for your organization.
Within the confines of the standard P&L format, you can tweak your report to better serve you and bring better returns to your investors. If you have questions about your P&L, contact your CRI CPAs today.