Analysing the Profit and Loss
With an understanding of the data included in the Profit and Loss report, you're ready to analyse it. Knowing what to look for and how to interpret it is important to understanding business performance.
The more detailed the Profit and Loss report is, the better you can see how your revenue is split out by product or division, and where your costs are. This will help you make a more informed decisions about spending more where profit is greater or spending less where profit is lower. Set up analysis types in Accounting to provide this level of detail.
Where to look to reduce expenses
You may be selling your goods at a higher price than you are buying them, but when you factor in all your overheads, you may be losing money. Having products or services that aren't profitable enough can cause you to look for ways to cut costs. In most cases, overheads are the best place to start.
Comparing periods can help you gauge the progress of the business over time. Look closely at drastic changes, like a drop in sales. Identify trends to determine where your business is heading. You can measure the success of your strategies and determine if revenues are growing faster than expenses by comparing annual performance.
Often, investors and lenders use the Sales value to determine the size of a business and whether it is growing or declining over time.
Analyse the months when your sales are high. What are some of the factors that drive success? What about marketing, for example? Did this increase sales? Do your sources of income have the potential to survive over the long term?
Can expenses be reduced? What are your biggest expenses? Is it appropriate for your business?
Positive Net Profits are essential to the viability of any business. Negative Net Profits cannot be sustained without additional investment.
Forecasting and budgeting
Use the Profit and Loss report to help project future cash flows based on previous year comparisons. With forecasting, you can make the most of the good months while surviving the bad ones.
For a project-based revenue stream, it is imperative to continually modify your budget so that you are prepared for any cash flow gaps between projects.
Compare a Profit and Loss report to the prior year