You need a smartly designed P&L (profit and loss) report that serves as a hands-on tool for managing profit.A good P&L report highlights the key variables that drive performance for each major profit center of your business. It should serve like a well-used map that directs you to the right destinations. You may need different formats for different profit centers in your business.
- A P&L report generally should focus on margin, sales volume, variable expenses, and fixed expenses.Margin per unit equals sales price minus product cost and minus the variable expenses of making the sale. Your business must sell enough volume to earn total margin equal to fixed expenses before breaking into the profit zone. After reaching the break-even point, the margin from additional sales goes entirely to profit (before income tax).
- Relatively small changes in profit factors can yield dramatic results.A small slippage in margin per unit can have a devastating impact because unit margin is multiplied by total sales volume. On the other hand, even a slight boost in sales price or a little more sales volume yields a lot more profit.
- You must clearly understand every cost figure you use.Product costs depend on which accounting method is used, such as the choice between the last-in, first-out () and the first-in, first-out () methods, or they depend on rather arbitrary allocation methods. Know how your costs are calculated! Press your accountant to explain if you are not clear about costs.
- Take charge in choosing the accounting methods for your business and the design of your accounting reports.All too often business managers adopt the policy that accounting is best left to the accountants. Unfortunately this may result in not fully understanding your own financial information.
- Establish and enforce strong internal controls. Businesses handle a lot of data and money, which present countless opportunities for errors, customer theft, embezzlement, and fraud.Make sure bulletproof internal controls are in place and working well. When your internal controls are weak, you can be sure that some of your hard-earned profit will go down a rat hole.