What is one thing you look for when reading a P&L?
To help you read profit and loss statements (P&Ls), we asked CEOs and finance professionals this question for their best tips. From focusing on the gross margins to looking for any additional income, there are several strategies that may help you read P&Ls in the future.
Here are 11 tips for reading P&Ls:
- Focus On the Gross Margins
- Assess Your Net Income Or Loss
- Calculate Your Gross Profit
- Check Your Budgeted Costs vs. Actual Costs
- Pay Attention to The Period of Time
- Understand Why You’re Reading a P&L
- Ensure The Math is Correct
- Analyze The Seasonality
- Watch For Depreciation On P&Ls
- “Cut Out The Fat” – Breaking Down Your P&L
- Look for Any Additional Income
Focus On the Gross Margins
One thing that is typically looked for when reading a profit and loss statement is trends in revenue and expenses. This can help to indicate whether a company is doing well or not. Additionally, if you want to be a good financial analyst, you should always focus on the gross margins. This number shows how much the company is actually making after subtracting all the direct costs associated with producing each unit of the product/service they sell. Gross margins can vary greatly from industry to industry and business to business. The higher the margins, the better. A company with good gross margins is one that can produce a product at a relatively low cost, or one that can produce a product at the same cost as other companies and sell it for a higher price.
Rachel Hemsley, MakeBreadAtHome
Assess Your Net Income or Loss
Your net income, or loss, is something you always want to see in the black. You need to keep it up if you’re going to be successful in business or hope to expand your operations. You may sometimes see a loss, but if you know the reason, such as more expenses in a particular month, you can make up for it the next. Look at your net income for the clearest picture of where finances stand for your business.
Carey Wilbur, Charter Capital
Calculate Your Gross Profit
Looking at your gross profit can give you a good idea of how your supply and production costs influence your ability to generate income. Gross profits can vary from month to month, so it can be difficult to plan around them. You need to look at this to get a sense of the gross profit margin ratio. Calculate this by subtracting the cost of your goods sold from the net sales to see how efficiently your company is operating.
Brian Greenberg, Insurist
Check Your Budgeted Costs vs. Actual Costs
I like to see the budgeted costs versus the actual ones, seeing where we performed as anticipated and where we missed the mark. Whether the actual was better or worse than expected, determining where and how the business deviated from the budget can help inform our strategy and budget for next year. We can use the P&L to gauge how this year is going, too, so if we need to make a quick pivot to adjust the budget we can do so quickly before a small issue or oversight becomes a bigger one or we lose out on maximizing revenue further.
Stephen Light, Nolah Mattress
Pay Attention to The Period of Time
A profit and loss statement helps you see the general financial picture of your company for a specific period of time. It is important to be able to differentiate between a monthly P&L and an annual P&L. You can compare P&Ls on a month-to-month or year-to-year basis to see and analyze trends. This is important for projections and decision making. By paying attention to the period of time, you can compare apples to apples and avoid simple errors in your financial assumptions.
Allan Switalski, LendThrive
Understand Why You’re Reading a P&L
It all depends on why you are looking at the P&L. Obviously a banker is going to look for different things than say an investor or a purchaser of a company. Or of an IRS examiner, of course. The purchaser of a company will want to look at the value of assets, source(s) of income, and expenses. With respect to expenses, it is important to look carefully at owner and even top employee compensation. Many times an entrepreneur will not take any compensation, or much reduced compensation, in order to plow funds back into the business. It is important to know, if an owner or key employees who will not stay with the company after the purchase are being compensated at the level it would take to replace them. It is tempting to overlook top contributors role in the success of an enterprise and underestimate the cost of replacing those efforts.
Leo Fischer, Lee Fischer and Associates, Inc.
Ensure The Math is Correct
All too often with P&L statements, the math doesn’t quite align correctly and so, that is why I always ensure to double and triple check the math. It is so important that these numbers are correct in order for your company to properly formulate a proper plan of action. Checking all the math will also give you piece of mind that all the information on the statement is 100% accurate.
Colin Palfrey, JollySEO
Analyze The Seasonality
Seasonality is the fact that things change based on the season—this can be seen in many parts of a business including but not limited to both sales and expenses. I look for this every time when reading a P&L to see what business looks look during each of the four seasons. This is invaluable insight that allows me to adjust marketing efforts and schedule detailed, targeted campaigns accordingly. Analyzing the seasonality of various metrics of my business also allows me to capitalize on times of heightened demand to maximize sales, outreach, and even website traffic.
Datha Santomieri, Steadily
Watch For Depreciation on P&Ls
One thing to always look for on a P&L is depreciation. All equipment, digital or physical, deals with daily wear and tear. This can add up over time, or one massive, sudden problem can eat into profits at a moment’s notice. Always keep an eye on depreciation and stay up to date to stay current and accessible.
Loic Claveau, Prometeus Labs
“Cut Out The Fat” – Breaking Down Your P&L
When scouring through your profit and loss statement, pay close attention to the unnecessary business expenses. Of course, things like insurance costs and certain overhead are unavoidable when operating a business, yet distinguishing which of your expenses are more of a luxury than a necessity is vital as revenue accumulates. Look to cut out the fat. Throw your money towards the main revenue generators and put your energy towards maximizing resources in that area, while minimizing expenses towards lackluster products or services that don’t play as large of dividends.
Ultimately, you want to be able to see the future through a P and L. Don’t think of it as a monthly or quarterly recap, but as a glimpse of where you are headed dependent upon what action you take now. The short-term wins can lead to long-term success the same way short-term losses can spell trouble in the future.
Mitzi Runyan, Lashlette
Look For Any Additional Income
When looking at a P&L statement, you’re obviously going to immediately look at the net sales and overall revenue for your business, but it is important to not ignore any additional income outlined on the statement. This could include donations, fringe benefits, money from stock investments, or any other amount of money procured from outside activities unrelated to the primary purpose of your business. Keeping track of all forms of income keeps your finances accurate, and can give you ideas on how to obtain more extra income in the future. Figure out how you’re obtaining this extra income, and invest more in those financial channels. You’ll see the benefits!
Brett Larkin, Uplifted Yoga
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