Imagine you and your business are in a never-ending race for profit. You have competitors, a tricky course ahead, and lots to consider on your way to success—including your financial engine. You’ll need to keep that engine in top racing form if you are going to achieve the goals you have in mind.
But how do you know if your engine is operating properly and has what it will take to get you there?
It may seem like a mystery, but there are actually some very simple and extremely helpful tools to check the health of your financial engine. My favorite is the P&L Statement.
What’s a P&L Statement?
Your P&L is short for profit and loss statement, and is also known as your income statement. It’s the summary of the money coming in and the money going out—and the difference is either your profit (if you have money left over) or your loss (if you owe money).
The reason I appreciate the P&L is that it serves as a quick snapshot of your company’s financial health. Think of it like the dashboard on your car. If you are driving along, and your car starts to sputter or screech, you immediately look at the dashboard to see if any warning lights have come on. If your Check Engine light is on, you know it’s something serious! And you know to get some service, fast. But sometimes, you are driving along and a dashboard light turns on even though the car isn’t presenting any troubling signs. Those warning lights are telling you something you aren’t even aware of, alerting you to take care of something now so it doesn’t become a larger problem down the road.
The P&L does the same thing for your business. It can alert you to signs of financial trouble that are both urgent and on the horizon. With regular review, your P&L can keep your business in top financial form.
But what if your P&L isn’t easy to read? That will negatively impact its usefulness—which is why I recommend customizing your chart of accounts so that data in your P&L gives you the best snapshot of your company’s health.
How to Customize Your Chart of Accounts
A useful P&L doesn’t happen by chance. It takes a bit of work to get the data behind the scenes organized in a way that creates the picture you want to see in the report.
It all goes back to your Chart of Accounts. Think of this as your business’s filing cabinet, when you place every expense and revenue. If you dump every receipt into a drawer without placing it within a folder, you will have to sort through every piece of paper to find what you are looking for. But if you create a system, you can place each item in its proper place from the start. That’s what a program like QuickBooks offers—a way to tag and organize every action of your business so that it can be presented back to you in a meaningful way.
The three main categories within your Chart of Accounts are Revenues, Cost of Goods Expenses, and Overhead Expenses. Your Revenues and Cost of Goods should be customized according to your main income streams so you can assign transactions to specific business activities. Proper organization behind the scenes will give you the information you need to make strategic financial decisions. For example, you might notice that income stream #1 is 40% more profitable than income stream #2—and that may lead you to redirect efforts to an area in need or it may tell you to redirect to an area of growth. Most small businesses do a decent job here.
But where so many small businesses fall short is in organizing the Overhead Expenses. We recommend dividing it up into four main buckets:
- Comp & Benefits: wages, payroll taxes, payroll fees, benefits, etc.
- Operations: rent, vehicle expenses, computers/tech, security, etc.
- Sales & Marketing: promotions, communications, travel, etc.
- General & Admin: office supplies, insurance, general expenses, etc.
Dividing your overhead expenses into these categories will show you at a glance if you are spending more on your benefits than you planned for or if you haven’t invested properly in communications in quarter three.
Get Your Dashboard in Order
Customizing your chart of accounts will deliver a P&L that informs your financial strategy. To learn a bit more about this process, watch this Officeheads video on Reorganizing Your Chart of Accounts. And if you’d like some help getting your data in order, that’s our speciality! Reach out today to see how we can help you get on track toward your goals.