How to Manage Profit & Loss

October 10, 2014 Published by
Entrepreneurs need to properly manage profit and loss to ensure the long term sustainability of their businesses. When sales exceed expenses, the business profits. When the opposite is true, the company generates a loss. This calculation is straightforward enough, but managing profit and loss is a delicate balance that requires a thorough understanding of how every element of the business works together.

Measuring Profit and Loss

An income statement (or profit and loss statement) enables business owners to see their revenue and expenses for a particular period of time. After you have subtracted the latter from the former, your balance will reveal whether or not you have had a profitable fiscal year.

Looking at profit & loss patterns:

If your business is generating a loss, look back at all of your streams of revenue and expenses for at least the past three years. This time period will give you a fuller understanding of why your company is losing money.

  • Look at expenses as a percentage of revenue (relevance)
  • What has changed? 
  • What items, in isolation or with consideration of other expenses, is contributing to the loss? 
  • What outliers (one-time expenditures or revenue streams) may be skewing your income statement(s)? 
  • What type of correlation exists between your sales and expenses?
  • Do your sales cover your expenses? 
  • Can you cut costs to increase profits? 
  • Are you losing money on any products where expenses cannot be altered? 
  • If so, these products may need to be discontinued 

Managing Loss

  • If your company is not generating sufficient profit, then you need to know why:
    • Look internally
      • What operational behaviours are affecting profit/loss?
      • Can you improve the correlation between production costs and sales?
      • Pay attention to overhead costs, as they can quickly deplete profits when not kept in check
    • Consider external factors
      • What economic trends are affecting your statements?
      • Is the whole industry suffering?
      • Are positive changes predicted to occur within the foreseeable future?
    • Create a strategy that enables you to generate a profit
      • Sell more products
      • Cut costs
      • Diversify
      • Change the direction of your business

Daily operations can get in the way of recognizing the big picture. Year after year, are your company’s profits trending upward or downward? You need to recognize this before your enterprise begins to struggle financially. Get the operational and financial management help that will ensure your business succeeds. Contact Hogg, Shain & Scheck for a results-oriented profit management strategy.