Managing profit and loss is a crucial element of a solvent and financially healthy business. Profit and loss statements need to be produced on a regular basis, so that you can see where you are making a profit, or where losses are occurring. To minimise the latter, a company will use the statements to control expenditure and keep revenues positive.
Assessing finances
To successfully manage this area of the business, a statement showing the current profits and losses for the company should be compared with statements from previous years or periods. This information can be used by an accountant to ascertain the average levels of expenses and revenues.
Rather than trying to perform this task yourself, especially if you don’t have the required analytical skills, you may want to consider outsourcing finance and accounting services. Obtaining accurate data now could prevent problems at a later date.
Analysing the company finances
Analytical tools may be used to prepare statements showing expenses as a percentage of total sales. Analysis will indicate which costs are having a negative impact on profits and where action can be taken to reverse the situation. The analysis should be performed for the last few years, possibly three or four, so that an accurate picture can be obtained.
If there are costs that are increasing in comparison with others, you may be able to make changes so that you can reduce your outgoings. The cost of raw goods used to make products will naturally increase slightly over time, but other costs like the premises or utility bills should remain at a steady rate.
Expenses
Cost increases need to be explained where possible, so that you can decide whether or not to take action. Some costs will be affected by external factors, like the economy or the increasing prices of raw materials. As costs increase over time, as a percentage of sales, you may need to consider alternatives to slash expenditure.
Sales
It is possible for sales to fall, even if production and other costs have been reduced to a minimal level. Rather than wait for the company to experience financial difficulties, it may be possible to take action and prevent further losses. Possible solutions include discontinuing lines that are not proving to be profitable, or selling company assets to free up some cash.
Profit and loss is a specialised area. If you want further information, give us a call now.