Understanding Your Business Profit
As a small business owner, one of the most important goals especially in the early years is to create a profit. We have committed work, time, sweat and tears to our business, that creating a profit signifies that we have made it, our business is successful. Profit also allows us to continue to materialize our dreams of growth and changing lives with our passions.
The best way as an owner to understand profits within your business is to have an accurate profit & loss statement otherwise known as a P&L. The P&L will provide all the areas from which revenue is being generated. It will also provide the costs/expenses that are being incurred. This type of statement is usually best run monthly to be able to have details on a smaller scale and to be able to make changes as needed.
Here are tips to help you understand your P&L:
If your business provides multiple streams of income then you should have those broken up to show up that way on your statement. For example, if you are speaker/writer/coach. Then you should have Speaking Revenue, Book Revenue and Coaching Revenue.
Make sure your costs are detailed enough that you can understand what costs are related to which source of revenue or related to running the business. At the beginning of your business you may not need to be as detailed but as your business grows, don’t wait to make sure the detail is there.
There are direct costs in your business that are related to the product/service that you produce. Such as paying a publisher for your books that you will sell. There are indirect costs that exist to simply run your business. Such as the costs of phone bills for your business.
The purpose of the detail in both your revenue and costs is so that when you are analyzing your monthly report you know exactly the following:
Areas that are struggling in revenue.
Revenues that may be incorrect or not showing up at all.
Costs that are too high in one area or over a certain time period.
Numbers that may be erroneous.
Usually the revenue that is on your P&L is cash that will be received in the future. This will help you plan cash flow.
An accurate P&L will show if your business has made a profit/loss over a certain period of time. The accuracy is dependent upon the information that is inputted in the business financial system. A solid financial system is a must for any business success.