Get More Insight with These 3 Versions of the Profit & Loss Report
What is a Profit & Loss Report? (P&L)
A profit & loss statement is a key report to run monthly in order to enlighten you about the health of your business. It shows your income, cost of goods sold (COGS) or cost of services (COS), gross margin (income minus COGS/COS) and it shows your expenses or overhead. Most importantly, it shows your total net income otherwise known as profit.
Many of you may already be running a basic profit & loss statement, which will give you solid information and insight regarding your business’s performance, but could you be getting even more out of this report?
Let us ask you a few questions!
Are you able to answer these questions today in regards to your business’s financial health?
How does your profit compare this month to the same month last year?
How does your income this month compare to last month? Was there an increase/decrease? How much was that increase/decrease?
Are there any trends that are related to seasonality or other occurrences?
Are there any unusual expense items that are showing up in a certain month?
What months show the biggest percentage of growth from month-to-month as it relates to income/sales or profit?
If you can’t yet answer these questions, no problem. Here are 3 versions of the P&L report you can run to give you more visibility into the workings of your business.
Most accounting software will allow you to run these different versions. If you are using QuickBooks Online, you can even save each of these reports under Custom Reports to easily access each month. Just make sure your books are completely up-to-date and reconciled before you run your reports.
PROFIT & LOSS YEAR-TO-DATE BY MONTH
Year-to-date? That sounds legit. It is! A year-to-date (YTD) report shows a summary of the transactions across each account that occurred starting from the beginning of the year to the current date. So, if we ran a report on September 1st with the YTD selection, it would include all transactions from January 1st to September 1st (assuming you are on a standard calendar year).
We like to take the YTD report a step further and run it by month. That way we see a summary of the activity in each account by month and can start to gain more information.
Important Takeaways from this P&L Version:
This report is great for identifying trends. Do you see a steady increase in income across several months? Is there a gradual increase in a certain expense account that maybe you want to put the kibosh on? Are your cost of services gradually increasing but your income is not? This could mean it is time for a price increase.
You may also notice unusual items across the months. When we review our clients reports we always look for unusual spikes or drops across each month. You might notice a spike in your software subscription fees. Could this mean you were double-charged? Or did you expect this because you paid an annual subscription fee. Spikes aren’t always bad, you just want to understand them.
Is there an unusual spike in income for a certain month? Maybe an invoice was duplicated (you want to remedy that ASAP so you don’t pay extra tax) or maybe you just had a stellar month! Again, just good to understand the patterns you see.
PROFIT & LOSS YTD BY MONTH – ADD ON PREVIOUS PERIOD COMPARISON
Let’s build off the P&L YTD report. Basically, all we are going to do is take our P&L YTD by Month report that we ran in the last example, and add to it. Within most bookkeeping software, you should be able to add a column where you can compare the current month’s performance to the previous month for each account line item.
Within QuickBooks Online, all you do is go to the dropdown at the top of the report titled “Compare Another Period”. Once in there you select “Previous Period”. You then have the option to see this in percentage or amount. Once you select these items don’t forget to click on “Run Report”.
Now what you will see is each month as you did in our first report, but then there will be an additional column showing you amounts for the previous month for comparison along with the percentage or amount change between those two months. Voila, now you have so much more information to work with.
Important Takeaways from this P&L Version:
In this version you can see the percentage change (our favorite way to view it) from month-to-month. So, for example, you could see that your consulting income increased by 50% from January to February, and then 60% from February to March. What is driving this trend? A successful marketing strategy? An increase in prices? A trend of clients liking to work with you early in the year to be set up for success throughout the year? All important things to understand.
What about cost of goods sold or expenses? Is there a month where you have a large increase from one month to the next? What is causing this? Is this a one-time occurrence or does this increase continue? Do you need to switch suppliers or is this cost increase unavoidable. Maybe you need to raise prices?
What about profit? Is there a period where you see a gradual decline from month-to-month? Maybe this is an off-season for you. Is there something you can do to drive sales or maybe decrease expenses during this time?
PROFIT & LOSS YTD BY MONTH – ADD ON PREVIOUS YEAR COMPARISON
In this report version we will start again with the P&L YTD by Month. Then in the same dropdown as the previous example, select “Previous Year” instead of “Previous Period”. This shows a comparison between a month within the current year, and that same month within the previous year.
Important Takeaways from this P&L Version:
Again, identifying trends is the name of the game. Maybe we see a trend of steady increases in a certain income account as it compares to last year but then all of the sudden we see a decrease in March compared to last year. Why is that? Were you out on vacation and not offering consulting services that month (that sounds nice) or did one of your stores have to close for repairs? Basically, if a certain trend suddenly reversed, it would be good to understand why.
In the expense category, maybe you are seeing larger and larger increases in certain accounts as compared to last year. Make sure you understand what is driving these increases. Is your income increasing at the same rate? Or is this affecting your profit considerably?
Profit & Loss Statement (P&L) VERSIONS RECAP
The main takeaway here is these reports allow you to slice and dice the same data in different ways, so that you can get more insight into your business. Increased clarity allows you to make more informed decisions. The greatest importance of these report versions is that they get you thinking and asking questions. You start by seeing certain numbers or trends that seem unexpected. This leads you to dig into the details to really understand what is going on.
The sooner you can get in front of an issue, the more adaptive you can be to effectively handle said issue. Also, maybe there is a positive trend you can capitalize on and ride the wave to further success.
In short, you can’t run your business effectively if you don’t have a thorough understanding as to what is going on currently.
Play around with these different versions, ask questions, and get to know your business on a deeper level. Your business will appreciate the quality attention.
We’re always here to help. If you’re feeling stuck don’t hesitate to reach out to us!
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