As strange as it sounds, some small businesses really don’t know if they are profitable until they have their taxes done each year. At a very basic level I see this every month in people who have booths in flea markets or antique malls. I sell in both venues, and when I’m talking to some of the other vendors they usually want to know if I “made my rent” for that month. If they make their rent they feel like they had a good month. It never crosses some of their minds that there is also the cost of goods sold to be considered. In fact, many of them don’t track what they paid for the items they’ve sold. If they get a check each month from the mall owners they feel they’ve done well.
This line of thinking becomes more dangerous when it’s applied to something a little larger. Without a true Profit and Loss statement a business owner will not know if their business is profitable or not. No one can afford to wait until April 15 to find that out.
A P&L needs to be run every month soon after closing out the books for that month. If you can’t figure a P&L you need to have your accountant do it for you. Every month. If you don’t know how to read a P&L, and many small business owners don’t, you need to have your accountant teach you. You must know your numbers so you can change strategy if needed.
When I owned my previous business I did a P&L by the 10th of every month. In my current auction business I do a P&L after every auction. I know exactly how much money I made the day after every auction. I can immediately tell if I need to increase advertising, or if I’m paying too much out in salaries, or if I need to raise my commission. I can take steps before my very next auction to improve my profitability if I need to do so because I know what’s working and what’s not.
I should have been doing a P&L after every job in the previous business. The monthly P&L was helpful, but it didn’t give me the information I needed to make immediate adjustments in strategy. Had I done that we could have known if we were spending more hours on jobs than were being estimated or if we had not allowed enough for equipment or parts. If we found that we were losing money on jobs we could have made adjustments to our billing or other calculations to return to profitability.
Your business needs that same information so you can adjust your strategy when needed. You may have increased business. You may have a solid cash flow. But the primary question remains, are you making any money?