It takes me about 30 seconds to judge the quality of accounting work being done by a company by looking at their latest financial reports.
What you should know about profit and loss statement
Just a few weeks ago, I was chatting with a buddy of mine who runs a $2.3 million business and wasn’t feeling it. We sat down and the first thing I noticed is while he was making $2.3 million. He was also spending $2.3 million – and didn’t realize it.
His question was: “What am I spending the money on?” Sadly, his profit & loss couldn’t muster up the answer. He had $300,000 sitting in an “ask my accountant” bucket and another $80,000 in various miscellaneous accounts. About $600,000 in cost of goods sold which was glaringly under-stated if you’d simply understand his business model.
The financial report was useless and not worth the paper it was printed on.
Like the chart of accounts, your profit and loss statement needs to be organized, consistent, and contain all (and only) pertinent information.)
3 steps to help your profit and loss statement sing
- Be consistent.
Ensuring you have the appropriate categories and consistent account numbers makes your P&L statement easier to read and find out what you need to know.
- Make it Relevant
Including accounts that make you scratch your head or have less than $1000, or negative balances in them, is a waste of time. Keep only important information in the profit & loss statement.
- Keep it Clean
Double accounts, accounts that are more than three levels deeps, numbers in “host” accounts, negative numbers, miscellaneous, and ask my account buckets need to be removed or cleaned out on a regular basis.
Remember, a profit & loss statement gives you a clear picture of what operations look like over a period of time, tying revenue and expenses to help you understand how the business makes money. If yours doesn’t do that – it’s time to get help.
DeepSky hosts occasional Scotch & Numbers around the world where we sit down with entrepreneurs to go over their profit & loss statements and decipher hidden issues where we can improve on – all for just the price of a nice glass of scotch and good company. Give us a shout to find out if we’d be around your town soon.
Read our Spring Clean series following this post to learn how to measure what you want done and purge your chart of accounts.