It can show more than just your profits.
While every business owner should be familiar with the basic financial statements, including your balance sheet and cash flow statement, you can also use these statements to help guide your strategy.
The income statement, also known as your profit and loss statement, can tell you much more than bottom line numbers. In this blog, we’re bringing you details on how to break down your profit and loss statement to help you better understand how to guide your business.
A profit and loss statement can be broken down into segments of any type that you think apply to your business.
For example, if you have a few layers to your business – production, operations, sales – you can segment your statement out by departments.
You could also review your statement by comparing different services or products with one another.
Or if you’re a project-based company, you can compare results project by project. You can also compare each sales professional’s performance against your profit and loss statement, different business locations, etc. Any way you can slice the data will probably be relevant and helpful to review.
Why all this segmentation? Because the information can empower you to put resources in the right places for the greatest success and cut your losses in others.
After allocating Revenue, Cost of Sales, and Expenses to each bucket, your next step is to review the information, and ask yourself several important questions:
- How much did this segment contribute to bottom line profits?
- How high were the segment’s expenses when compared with other segments or previous years?
- What are the gross or net profit margins of each segment (helpful for comparing segments not equal in size)?
- What assets were used/invested to produce profits?
- How do the results compare to your expectations?
After you’ve gathered your most important information, you can dig into how the information affects your business, and how you can use it to plan for the coming year.
Are there services or products that make a better profit margin than others? Perhaps you can invest more in those segments next year.
Maybe you have a sales person who has a solid sales process and you can replicate that across your company. Or maybe you’ll find that a certain segment took an enormous investment of assets but is not seeing the return you expected.
Some divisions may be racking up more expenses than you thought they were, and it’s not a high producing division because of that. You may need to adjust some practices within the business.
If you’re seeing some projects that were high performing compared with others, you can dig into contributing factors to discover the points that made the projects more successful.
Year Over Year
It’s important to note that while it’s good to compare expenses across segments within the past year to see some data points and review possible updates to procedures or future investments, analysis shouldn’t stop there. Comparing data year-over-year can give you a much more comprehensive picture. If you’ve been in business for a few years, you can see what’s grown, and what areas have been struggling. More data can make it easier to see actual trends and define possible areas to focus on vs. what could be a one-time blip. Some segments might represent a small sample size, and you want to make sure you’re not overreacting to results that could look very different over a longer time span.
The Right Segmentation
It may seem daunting to take a profit and loss statement and break it into so many pieces to review – but with the right expertise, it can make a big difference as you steer your business into the future. Working with an accountant who understands your business can help guide you through what segmentation to review and help you with discussions and thoughts on next steps to take for your business based on your results and analysis.