Brett shares his insights into creating and interpreting your small business’s profit and loss statement.
For today’s show, I thought we’d take a little stroll down the path of profit and loss statements. Because nothing is better than understanding your small business’ numbers.
I’m going to talk about some common themes when it comes to P&Ls, and I’ve put them into six different categories.
Now I want you to keep in mind a couple of things.
Everyone has a different way of looking at a profit and loss statement.
A tax person will want you to do it in a certain way, of course. They only care about your profit and loss because it helps them file your taxes. And your taxes tend to group a lot of things.
However, when I’m looking at my P&L, the more information I have by category, the better. It helps me understand what is going on in my business.
Sometimes my accountant will want me to put things in certain places that will benefit the taxes. But it really doesn’t help me understand my costs and expenses because they lump all of that together when they’re doing my taxes.
The same thing holds true for any bookkeeper you might have. If a bookkeeper is trained in a certain way, they’re going to try to put you into that same way they’ve learned how to do it.
Now, there are some basic accounting rules that you must follow. And in many cases, they’re trying to follow a consistent flow.
Most accounting programs like QuickBooks, for example, will default things to certain categories. However, every program allows you to create your own way of doing things. Anything is possible no matter what your bookkeeper may tell you.
You can absolutely set up your profit and loss statements to read however you would like.
Even if bookkeepers or accountants say you can’t, it’s just because it’s not their way of doing it. As long as it follows the generally accepted rules of accounting, you are okay.
Because ultimately your profit and loss is just the flow of money through your small business. And it’s important that you capture it as it happens because that’s going to give you the best information to make the best decisions you can in your business.
Episode Highlights
- [03:10] What it means to expect what you inspect.
- [06:28] Why you don’t want your profit and loss statement to fall more than 30 days behind.
- [09:00] Why inventory purchases may skew your P&L for the month.
- [11:46] What monthly P&L trends can tell you about your business.
- [15:20] What it means when you see volatility in your profit margins, and why it’s not always cause for concern.