Profit and loss: How to ensure you stay in the green every month
As part of business planning, it's essential to know how much money you're making, and what to do if you're not making enough.
There are two things you must have to stay in business: profits and available cash. When you sell stuff for more than it costs, you build profits. Discovering this changed my life and set me on a path to make my own money and help others do the same.
As the owner of your business, you are also the financial manager. It's your money and your responsibility to track profits and cash as part of business planning, every month. With a profit and loss financial report (aka an income statement) you'll outline this information: revenue – expenses = profit. As long as revenue is greater than expenses, you can turn a profit. Learn how to understand what profit you're making and how to secure your profitability every month.
Get to a known financial position
What if you don't really know if you are profitable? It's a common question. The first step is to get to a known financial position — or KFP as I call it.
Work with your bookkeeper and tax accountant to dig into your balance sheet and income statement. Go line by line down the reports and ask questions. Learn what the accounts listed in these documents stand for, how they are populated, and what you have for assets, liabilities, equity, sales, and expenses.
Take action to make a profit every month
Review these essential financial reports at the start of the month. Otherwise, the month is over, and you may have lost money without even knowing.
As the month progresses, take action to ensure profitability.
Play offense by influencing your sales. What actions could you take to increase sales? Run a contest? Make a few more calls?
Play defense by managing your expenses. Don't buy anything that can wait until next month. Hold back or delay hiring new employees. Or cut back on the travel expenses by holding virtual meetings.
Every week, check your cash position. You may be profitable, but the profits may be stuck in accounts receivable. Or your debt payments may be sucking the cash from the company. If your cash position is tight, collecting payment upon delivery can make all the difference.
Note that the sales in a single month may not line up exactly with the expenses for that month. For example, you may make a sale on the last day of the month, and not incur the payroll expenses to deliver those services until the next month. As you review the year-to-date information, the "leapfrog" of sales and costs balances out.
One change could right the ship, and turn loss into profit
One of these could make a difference — higher prices, additional revenue streams, different target markets, or a new product offering to relieve the cash squeeze. Once upon a time, my business was stuck in a tight cash position. We were doing new construction work. The project cycle from the initial sale to final payment could be six months or more. Sometimes a general contractor would withhold final payment until he was paid, and we had to put off paying our accounts payable.
So we decided to offer new services, and we raised our rates on those services. We required payment upon completion of the job, and started accepting credit cards. These changes resulted in improved cash flow, and we covered payroll and accounts payable each week.
Profitability keeps your business up and running. Once you master it, you can take your business to new heights.