I’m betting you didn’t start your business to become a financial expert. You’re not alone. The overlap between financial accounting geeks and green-industry pros is pretty slim.
But it pays — literally — to understand the basic finances of your business. Not only should you be able to read your profit and loss statement (otherwise known as a P&L), but you should also understand how to use the data on the statement to run your business smarter and more efficiently.
To help you develop that basic understanding, let’s take a look at your P&L and break it down into the most important sections.
Yes, But What Is a Profit and Loss Statement?
First, a definition: According to Investopedia.com, a profit and loss statement (P&L) offers a summary of your the revenues, costs and expenses your business incurs during a specific period of time (most often, a fiscal quarter or fiscal year).
Your P&L can show you patterns in your business’s financial performance: quarters during the fiscal year where you do especially well compared to other quarters, for example, or year-over-year anomalies that raise questions about what happened during an off quarter.
Steps to Create a P&L
To create a P&L, you need to keep great financial records, of both incoming funds and expenses. If recordkeeping isn’t your biggest strength, a bookkeeper or financially sharp administrative assistant should perhaps be the next support staff you hire for your business.
Once you know you’re collecting all the financial information you need, choose a time period you’re going to track (whether it’s monthly, quarterly, or yearly, be consistent).
From there, it’s easy. Calculate your business’s total revenue for that time period, as well as the total expenses. To find your profit, subtract your expenses from your revenue. Yes: In general, it really is that simple.
It’s even easier to create a P&L — one with even more bells, whistles, and finer details — if you use accounting software like QuickBooks or Xero, which can automatically generate one on demand.
How to Read Your P&L
Of course, there are some simple things your P&L can tell you: For example, if your expenses are consistently higher than your revenue…you might have a problem. But you can go deeper. Here are a few ways to do that.
Cost of Services
Costs directly related to the goods or services you provide can be grouped into a category called cost of goods sold, or COGS. A service-based business — like a landscaping company — might call this cost of services, or COS.
Costs in this category would include the salaries of your crews out in the field, fuel for your trucks and mowers, the chemicals used on customers’ properties, and more.
Keep an eye on this number: If COS is going up disproportionately with revenue growth, take a closer look at the costs you’re incurring to do business. Is this an industry-wide increase, or is it time to reevaluate your suppliers?
Selling, General and Administrative Costs
Costs not directly associated with the services you provide — such as marketing expenses, other employee salaries, office space and supplies, or company outings — fall under the category of selling, general, and administrative costs, or SG&A. This category is also sometimes called operating expenses, or OPEX.
This number can also raise a red flag: If your overhead is continually increasing, what can you do to keep it in check? Can you keep those costs down to maintain a solid profit?
Your total sales, minus the COS, equal your gross profit (or gross margin).
You may find it helpful to find out your gross profit as a percentage of total revenue. To get this number, divide your gross profit by total revenue. Why is this important? As your revenue shifts (hopefully increasing over time), your cost of services should remain roughly consistent as a percentage.
If that percentage isn’t remaining consistent over time, take a closer look at your operating costs to find out why there’s a discrepancy.
Gross profit, minus SG&A, equal your net profit (or net income). Got it? This is the line we all love — the one that tells us how much money goes in our pockets.
But as you can see, the other numbers are what gives this final line the context necessary to determine how well your business is really doing.
When’s the Last Time You Looked at Your P&L?
Are you consistently evaluating your profit and loss statement? What important insights has it offered into your green industry business’s performance?
Tracking and analyzing your business’s finances can be daunting tasks, but they are critical to the long-term success of your operation.
Spring-Green can help you grow and diversify with our proven business expertise developed over 40 years of experience. Learn more about how Spring-Green can expand your lawn care services. Call 1-800-777-8608 or visit us at www.growmygreenindustrybusiness.com.