Your P&L: Have you viewed it this way?

P And L

Happy February! (No worries, I’m not going to tell you that a month of 2022 has already passed – I know you know.)

I recommend Profit First to all my clients. It’s an easy read, especially if you don’t love tracking/looking at the numbers.

  • A former client recently shared that she’s reading it (YAY!!!) and it’s changed how she looks at her numbers. 
  • A long-time client recently shared that she’s picked it up again. 
  • Personally, I re-read several chapters annually.

After all, the job of a business is to be profitable. 

When I review a P&L (ours or a client’s), I look at the profits from two angles:

  1. What are the profits? 
  2. What are the profits excluding the owner’s pay?

As small businesses, there’s typically no board of directors, no one with input on what we pay ourselves as owners. 

  • Some owners take very little pay out of the business, preferring to take the majority as distributions (these affect the Balance Sheet, not the Profit & Loss Statement) or even to leave funds inside the business.
  • Other owners prefer to take the majority of profits as a salary.

For example, a business could show 5% profits on its P&L, yet when you take out the owner’s pay (just the owner, not the team), profits jump to 45%. 

If we didn’t drill down on the 5% profit percentage, we could think that the business isn’t faring well, when that’s not the case. The owner made a decision to show low profits in exchange for taking a high personal salary.

Same example: 5% profits. This time, however, when we take out the owner’s salary, profits increase to only 7%. It’s an entirely different scenario. 

There could be many explanations. A likely one is that revenue dropped and they kept shelling out too much for ongoing systems and other expenses.

Or they could have had some significant one-time expenses. 

This second scenario would require more investigation – while that sounds like a lot, we’re talking a few minutes of drilling down into the numbers.

The important thing is to review your finances and understand what the numbers are truly representing – and to do it throughout the year, not only during tax season.