Why you should review your profit & loss statement
At the end of each month do you breeze through your reports not paying much attention or even look at them at all? Reviewing your reporting monthly is key to staying on top of the financial health of your business and being able to make changes before a small issue becomes a big problem. Your profit and loss can tell you a lot about your business and help to make better informed decisions. Here are 5 reasons why you should review your Profit and Loss statement monthly.
1. Know your Position- Do you know where your largest income is coming from and what are your biggest expenses? Running a profit and loss will show you a break down of your income and expense categories that will total your net income. You can see what type of income is bringing in the most money and which expenses are the largest. Knowing your income versus expenses will also tell if the services you are providing are profitable or not. You can then adjust prices to make them profitable or only offer those profitable services.
2. Make Comparisons- Comparing the current year to prior years can show if the business has grown or declined. From this information you can determine why things have changed and adjust business practices as necessary to continue growth or to help build things back up. When comparing make sure you are comparing the same time periods. If you are looking at 2022 1st quarter, then look back at 2021 1st quarter to make a comparison. You don’t want to compare unsimilar time periods especially if your business has seasonal fluctuations.
3. Investments- Once you determine what your net income is, you must decide what to do with that money. Are you going to re-invest in the business, hire employees, or make other financial investments. If you are wanting to grow the business, you may want to see which services are providing the most profit and invest into improving those services. On the other hand, you may want to see which services are the lowest profit and invest in making those services more profitable. Let your money work for you don’t just let it sit.
4. Finding Unnecessary Expenses- By running a profit and loss you may find recurring expenses such as monthly or annual subscriptions that you no longer use. You can also point out what expenses are unnecessary or are larger than what you thought you were spending. Cutting out these expenses can surprisingly save you a lot of money that can be better utilized in the business. This can also help you to adjust your spending habits or finding a lower priced solution for your business needs.
5. Be Prepared for Taxes- Knowing what your net income is will make your estimated tax payments and tax planning a lot easier. You can take a percentage of your net income each month and put away into a savings account for taxes. If you have no idea what your profit is and haven’t been planning for taxes, you will have a huge shock at the end of the year when taxes are due. It’s best to put away more and have a bonus at tax time then not enough and end up owing more than expected. My best advice put the money in a savings account and don’t touch it.
