For a business to maintain operations, provide better services, and come up with new products, it needs to make profit. In any business, profit is always accompanied with certain losses. The key is to ensure that profit and loss management is done correctly to help businesses stay afloat and better yet, thrive.
What are Profits? What are Losses?
A profit is an amount of money that is more than its original price. On the other hand, a loss is an amount of money that is less than its original price.
In business, we say one makes profit when the business makes money or experiences a return of investment (ROI). A business experiences a loss when it doesn’t make money on a product or service but loses part of more than what the owner initially invested.
Profit is making money.
Loss is losing money.
What is Profit and Loss Management?
Profit and loss management is managing income (incoming cash flow) and expenses (outgoing cash flow) to ensure that a business earns a net operating profit.
Usually, profit and loss management deals with profit and loss reports (commonly called P&L reports). You can compare it to a report on how the financial aspect of business is doing or performing. It helps determine how profitable a business venture is or in case of P&L projections, how profitable it will be.
Profit and loss management is crucial to help a business stay afloat, project and strategize for its future and improve its performance. By comparing profit and loss forecasts with the actual performance of other companies—preferably competitors or role models, a business can identify areas they need to focus or improve on. For example, is the business spending enough on research and development to ensure that they can stay one step ahead from their competitors? Are they spending too much on expenditures?
All of these considered, we have come up with three ways for you to do profit and loss management right:
1. Monitor Profit and Loss Reports Constantly
P&L reports are generated on a weekly, monthly, quarterly or annual basis based on a company’s standard operating procedure. However, accountants can generate reports as needed and requested by the management. Take advantage of this and constantly look at the numbers. Look for trends and use it to forecast and project profits and minimize losses.
According to an article on business.org, a P&L chronicles a company’s fight for financial survival, as well as the results of that competitive struggle, during a specific period (quarter, month, or fiscal year). A company’s P&L data shows indicators like revenue, expenses, and net income, or net loss if expenses exceed revenue. Revenues range from operating earnings and interest income to cash generated on investments or in joint ventures with other establishments.
The reports alone can help you make informed business decisions to help your business maximize profits.
2. Combine Monitoring of P&L Reports and Cash Expenditure
Cash is still king, no matter the business type or size. Effective money management shows how a company saves money, grows its existing cash, and averts financial meltdown. This should be managed or controlled efficiently. Expenditures (outgoing money or expenses) should be monitored.
Combined with P&L reports, this helps a business save money during lean months, and have spending power on strong months to invest on new business products, infrastructure, technology, manpower or any aspect that is needed for business growth.
Developing a business strategy that combines these two will result in effectively managing business income and helps the company “feel” profits when they come in.
3. Outsource Team for P&L Management
It can be hard to generate P&L reports especially when there is too much red tape in the organization. It can also be challenging to do projections on it if you are too involved or immersed in the company. You tend to prefer to stick to gut instinct when making analysis.
Partner with a finance and accounting solutions partner to build a team of bookkeepers and certified public accountants to generate reports strictly from an accounting point of view could give a manager a different perspective. The team can also help develop a business strategy formula to help a business owner understand how to increase or make more money.
There are a lot of factors affecting the profitability of a business and profit and loss management is just one aspect. Effective business strategies, cash managements, maximizing profit and loss based on company’s strengths are examples on how a business can save money, make money and lessen losses. No matter how much cash a company has or how many assets it owns, losses extending over long periods of time will weaken the value of its assets, decrease its cash holdings and drive it to bankruptcy. Profit and loss management will help a business prevent substantial business losses from happening, if done right.
Managing your business’ finance and accounting on your own is taxing and does not always result in favorable results. With our customized solutions, rest assured that all your concerns would be addressed accordingly and at the same time, it would allow you to concentrate on other important factors vital for your company’s growth. Learn more!