Most of us know what a profit & loss statement (or income statement) looks like and is meant to do. Less of us understand the inner workings of how it is built, and even fewer truly understand the value it can provide to your bookkeeping operations if set up and run in a strategic, meaningful way.
In general, financial statements are summaries of the way you have categorized your financial transactions. They can only reflect the information that has been processed by you or those doing bookkeeping for your activities. Thus, the foundation of generating useful financial statements is a system of transaction categorization where accuracy can be trusted and the most important information easily shines through.
Foundation
Generating a useful profit & loss statement goes well beyond knowing what comes in and out of your bank account.
The good news is, the “well beyond” refers mostly to information already handy and at the ready, which is the knowledge of how your operation generates its revenue and supports that revenue with key expenses. Not a single person is more an expert at that than you, the business owner.
The critical step that needs to occur is the translation of that information into a system of organization for your financial transactions. In layman’s terms, the bookkeeping and financial statement categories you utilize should be strategically supported by an organizational system at the bookkeeping level that reflects how you run your business.
A Simple Example to Creating Value in Profit & Loss Statement
Example Business: A sandwich shop who wants to better understand which sandwiches are most profitable and which they may be better off taking off the menu
Key Operations: Sell 10 different sandwiches
Key Bookkeeping Organizational Need: Understanding which sandwiches provide the most (and least) profitability.
The System: A Point of Sale (POS) system that registers the sale of each individual sandwich. This makes revenue for each sandwich easy to see, but the critical component of our focus here is taking our understanding to a strategic level by 1) identifying the cost of each individual sandwich, and 2) connecting that knowledge to your financial transaction categorizations.
Information is Value
NOW, we have a system that not only gives us an idea of which items sell best, but we can see how those sales actually drive profit over time, because we now know how much those revenue sources actually cost us to put forth. This is the critical view of our operational financial data that helps us to start producing a profit & loss statement that provides strategic value.
When we start looking at this profit & loss statement over time, our system brings forth a very easy view of which sandwiches are selling best, which are actually driving the most profit, and how those figures hold up across the year.
The Cost Question
There is always a cost involved in setting up and maintaining business financial systems, whether it be your own personal time or paying a professional to assist you in doing so, and small business owners in particular often have to make that judgment call on how to address that cost, especially as operations start to pick up and growth is occurring.
The short answer – building this “cost” into your business as early as possible is always the way to go.
There should of course be consideration for how robust your system can actually be within the parameters of your time and money. But the stress and cost of fixing a broken system only when it has become imminent always exceeds the costs of setting up and running one correctly in the first place, and that is before you account for the ongoing strategic value provided by truly understanding your numbers.
Activate Your Information
The idea of setting up a system like this can be overwhelming both in consideration of time and cost, and it can often lead to kicking this can miles down the road in lieu of more time-sensitive needs.
In reality, both setup and execution can be relatively simple as long as you are working with the correct information and the right set of expertise. Perfection is not what we seek – we only need our system to include enough detail to produce the layers of insight we need in our financial statements to make our decision-making a little more dynamic and insight-driven.
When you pair your expertise with truly insightful data and financial statements, you put yourself in the best position for long-term success.
