5 questions to ask when you are reviewing your profit and loss report.
It is the first week of the new month and this is the perfect time to be reviewing your results from the previous month. My tip is to keep your accounts up to date throughout the month so that you can run a profit and loss at any time and get a snapshot of how your business is doing. So how should you do it ? Here are my 5 top questions that you should be asking when you review your profit and loss statement each month.
1. What result did we achieve and how did that compare to my expectations?
It is easy to look at a profit and loss statement and think that the number down the bottom tells the whole story – loss bad, profit good, but this is not the case. Your results for the month need to be given some context – something to compare against so you can measure if they are favourable or not, rather than read in isolation. You could set your reports up to measure your current months results against the last few months, the same time last year or a budget.
Even if you achieve a loss, but the loss is more favourable than you had budgeted, your business could still be on track to reaching your goal of break even or profit. This is a sign that you are either doing the right things within your business or that you need to change tack.
2. Which cost centres, locations, products, expenses met my expectations and which fell short?
Just looking at the overall result can be deceptive and may not always tell you the whole story. For example, you may record a profit for the month, similar to the previous month, and think that is terrific. However, if you looked at the breakdown of the results achieved by each of your locations, or product lines, you may see that one is losing money and is infact being supported by the more profitable areas. This detailed breakdown can focus your efforts on the areas that need the most attention and can highlight issues that you would not have otherwise seen. In Xero, locations or cost centres can be set up as tracking areas and a profit and loss run on each separately. This feature is magic and I highly recommend using it. You can also set up your chart of accounts to report on individual product types or areas.
3. Where did we fall short and what can I learn??
You have run your report and isolated the areas within your business that are not performing in line with your expectations. To make changes and improve your results, you need to understand WHY these areas have under performed. The first step to identifying the cause is further analysis of the numbers. Is it sales that have underperformed or is it expenses which are too high? If it is sales – is it the quantity sold that is too low or are changes needed to your pricing? If expenses are too high – which expenses – do you have the right number of employees, can you make cutbacks, do you need additional approval processes in place to tighten spending. Using your numbers to identify exactly what the problems within your business are is the key to improving your results.
4. What does this mean for the future?
Now that you have identified the problem areas within your business, you need to assess their impact on the results going forward. If, for example, you didn’t achieve the sales in one area of your business that you wanted to, how does this impact your overall goal for the year. If it puts you behind, what is the impact of this – how will it affect your cashflow? Will it mean that you won’t have enough cash to cover future expenses? Will you be able to make some changes to minimise the impact? I recommend having a cashflow forecast that is linked to your actual results so that it updates every month, according to the results that are achieved. This will help you look forward and see the impact of your results on the future.
5. What should I do next?
As the saying goes “ if you do nothing, nothing will change” so make decisions and changes to your business based on the information that you have learned from your review of the monthly accounts. Tweak your marketing, tighten your costs, review your pricing. There is a definite advantage for business owners who read their financial information early in the month, so that the information is current and they can react quickly to stem any parts of the business that are underperforming. If you look at your financials three months after the event it is all too late. The information that you now have at hand is powerful as it allows you to make informed, targeted decisions for your business. You can confidently make changes knowing that they are based on accurate information. So go, drive your business, make decisions and turn to your financial information to see what has worked and what has not.
Need some help?
Balanced Advantage specialise in preparing management reports to assist business owners in making informed decisions. We can also help you with our bookkeeping services to keep your financial information up to date throughout the month. See our reporting and bookkeeping packages for more information.