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The first time (or, to be honest, even the fifth or sixth time) you look at your profit and loss statement, if your background isn’t in finance or accounting, it can be a bit confusing. Don’t be discouraged. All you need to do is learn the accounting jargon, and approaching your P&L (also known as an income statement or revenue statement) will get easier every time.  
A P&L’s job is to give you a clear, overall picture of your business’s net income. How do you figure out what the net income is?
Subtract all your expenses from the total revenue you’re bringing in. But, it is not always that easy.
P&Ls can be more complicated depending on your business model. For a sole prop consultant, it could be very straightforward. But, a retail store with employees, suppliers, and more could have an incredibly complex statement.
P&Ls can be produced for any period of time, such as monthly, quarterly, or annually. The more often you generate them, the better.
Obviously, the profit and loss statement is incredibly important. In fact, most businesses are required by law to complete them. But, even if you weren’t, this is a practice your business should be religiously following. They help influence your future business decisions and provide a real idea of what is going on with your business finances. Profit and loss forms are also incredibly important if you plan to apply for a small business loan.

Diagnosing Your P&L

Here’s a little cheat sheet of the various terms that make up your P&L:

  1. Revenue – We know you know this one, but it is always good to review! Revenue includes the total sales that you make, along with money you receive from things like selling equipment or perhaps even receiving a refund on your taxes.
  2. Expenditures –  You know exactly what type of information is contained on the total expenditure line, but there may be specific types of expenditures you aren’t as familiar with.
  3. COGS – COGS stands for cost of goods sold. Long story short, just because you sell a cup of coffee for $4, you’re not making $4. You need to account for the cost of materials and time it takes to produce that singular cup of coffee.
  4. OPEX – OPEX stands for operational expenditures. These expenses include any other costs associated with running your business that are not included in the cost of goods. For example: workers’ wages, travel, training, leases, utilities, equipment purchases, hardware and software, advertising, cell phone, and internet service. The list can get quite extensive, depending on the size and type of business you operate.
  5. Depreciation – You already know that if you drive a new car off the lot, it immediately loses some of its value. This is depreciation — and it doesn’t just apply to cars. Equipment, machinery, and other items in your business can lose value over time, and this is something that can be counted as a loss at tax time.
  6. Profit – Profit is the “bottom line” on a profit and loss statement. It’s what’s left after you subtract all your expenses from your total revenue. And it’s probably the most important line for you. After all, your end game is to be profitable (and then once you reach that goal, increase that profit). However, if you dig a little further, you’ll find there are actually different types of profit represented on your statement.
  7. Gross Profit – This number is what you get when you subtract the cost of goods sold from your revenue. Business expenses like wages, utilities, and more are paid from your business’s gross profit.
  8. EBIT – This stands for earnings before interest and tax, and this number comes from subtracting both COGS and OPEX from your total revenue. The EBIT is a great indicator of business performance.
  9. EBITDA – This acronym stands for earning before interest, tax, depreciation and amortization. While this line can also be good for measuring profitability, the fact that it includes non-cash items (depreciation and amortization) means it doesn’t seriously impact your cash flow for the moment. But, it’s still important to understand. (However, most likely not as useful to you in the grand scheme of things.)

Understand your P&L is an important step to profitability (or increased profitability). Run your profit and loss statement frequently, identifying what is keeping you from your goal. Do you need to increase revenue, cut expenses, or both? Compare and contrast your most recent statements with past statements for a better picture of your current position and to help you make the most educated decisions going forward.

Need a profit and loss statement template? You can download one here for free.

A version of this post was originally published on the Fundera Ledger.

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.

By Joy Montgomery

You’re up and running but projects are taking longer than you expected. You’re running into problems that are chipping away at your finances. Customers aren’t paying as quickly as you thought they would. Expenses don’t stop and wait for you to have money. Opportunities to buy materials at an attractive price don’t wait until you have money. These and other issues affect your ability to keep yourself in growth mode. Here are three tips on where you can start having a positive affect on your cash flow.

1. Cash Cow. Looking at your operation, there’s something that is an entry-level product or something that you created in-house to streamline your own processes. Consider putting some emphasis on the quick products that can create a steady flow of income. A high-tech company had a test unit that field engineers took out into remote areas to test the strength of the product. No thought had been given to the marketability of that simple unit and it had the potential to generate sales in remote areas around the world. It was the most inexpensive item that the company built and had never been considered as a product. Another company had a little program that helped their own test engineers with their work. It was another unidentified product that could generate steady income. The owner of a small recruiting firm created a program to simplify his job. With very little effort, it could be used to manage any small business. The last time I saw him, he said that he had sold a number of the programs and made millions with them. It may not even be the business you’re in but there could be a steady income generator hiding in your operation.

2. Changes. This is not about bringing in more money. It’s about plugging leaks. My father was a General Contractor when I was a baby. The first and only project he ever had was a beautiful home in Marin County in Northern California. Dad had a partner – George. George was a customer pleaser. While Dad was out buying materials, George would be ripping out the bathroom because the homeowner realized they didn’t like the color of the floor to ceiling tile as much as they thought they would. Of course, that meant that the coordinating floor tiles had to go, too. George always promised there would be no charge for changes. The project made the cover of Better Homes & Gardens but it drove Dad and George into bankruptcy. If you were building a bridge between two cities you would have agreement on the specifications, completion date, and costs. If, when you were 90% done, the Mayors came to you and said they made a mistake and should have had one more lane in each direction, you could probably say, “No problem. We planned for future expansion in the design.” When the Mayors wanted assurance that you would still complete the job by the same deadline and for the same costs, you would discuss the increased time and money. You may not be building anything as big as a bridge but don’t let change requests eat up your cash.

3. Connections. Keeping your nose to the grindstone does a couple things. It wears you out and it prevents you from discovering information outside of your company that might have a significant effect on your operation. One small company struggling with cash flow issues didn’t have anyone available for networking. They brought in an operations management consultant whose marketing efforts were all about networking. As problems came up in conversation, the consultant had connections who had answers. Some zoning issues that created a safety problem for the employees had a surprising solution when the consultant mentioned the issue to a networking contact who was a commercial building contractor. The consultant knew an attorney who specialized in another area the company needed help with. A casual conversation between the consultant and a networking contact revealed a previously unidentified market for the customer’s product. All three of those happened over a two-day period as a result of the consultant’s ongoing networking efforts. It’s worth your time to stay connected to people outside of your company.

Conclusion: These kinds of solutions can be an ongoing benefit for your business with  clear, concise communication of the problems that are restricting your cash flow. Keep your eye out for the kinds of opportunities you’ve seen here.

Joy Montgomery is a coach for startups, small businesses and job seekers. She helps you position yourself for growth, profitability, and acquisition.

Article Source: Cash Flow – Want Some Tips?

At the core of every successful business is an entrepreneur who has invested the necessary time and resources into ensuring that he or she has established a strong foundation from which the business can thrive. By focusing on core skill development, you can dramatically accelerate your business’ rate of growth and achieve your personal and professional goals.

The Accounting and Financial Growth Assessment focuses on helping you identify the fundamental accounting and finance skills you need to develop and discover which resources should be invested to facilitate the financial growth of your business. This knowledge enables you to put strategies into place that methodically strengthen the business to maximize resources and ultimately increase profits.

1.     I have created a detailed budget that guides my decisions.

2.     I consistently use the three principle financial statements to measure and report the results of my business activity.

3.     I know the two primary ways to increase the bottom-line and have a plan for each.

4.     I have identified the company’s intangible and tangible assets.

5.     The essential and suitable finances are in place to grow and develop my business.

6.     Accounts payable is consistently handled in a professional, timely manner.

7.     Written accounts receivable policies and procedures support business growth and are clearly conveyed to my customers.

8.     My revenue is growing in sales and profits.

9.     Necessary local, state, and federal documents and taxes are filed and paid on time.

10.   A reliable bookkeeping system provides financial data that allows for an accurate business analysis at any point in time.

After assessing your accounting and finance skills, how do you measure up?

By Mary Goodman and Rich Russakoff

When you leave the corporate world to go out on your own, you trade the illusion of security for the illusion of freedom. It’s best to realize that now.

It’s also useful to think of starting a business like having a baby: It will take all the time you can give it and lots more money than you thought it would. Go into it with eyes wide open and be prepared to make a 24/7 time commitment. Part-time entrepreneurs have about as much success as part-time parents.

Before we go into how to increase your chances for success, first a few dire facts. Only about half of small business start-ups survive 5 years or longer. The top two reasons for failure are:

1. Lack of experience — not operational (building or selling your better mouse trap) but lack of business experience.

2. Running out of cash — the earning curve never catches up with the learning curve.

So, our best piece of advice to you is this: When you control your money, you control your future. Here’s a to-do list to help you get to the five-year mark — and beyond.

1. Overestimate (generously) your costs to start up.

A few years ago, a rock climber in Phoenix needed rescuing when he tried to rappel a 400-foot rock face with a 250-foot rope. Your initial cash for your start-up is like your rope. Are you going to leave yourself dangling 150 feet from your destination?

Don’t make the mistake of underestimating the cost of your new business and overestimating sales and your break-even point. Instead, try this: Take your best, conservative estimate for your start-up costs, then double it. Then add 20%. Surprisingly, this is usually pretty close to reality.

2. Know your break-even point.

Ten thousand dollars in sales does not cover $10,000 of expenses. Your cost of sales could easily be $7,000, leaving you $3,000 in gross profit, which you will need to pay all of your sales, general, and administrative costs. It’s simple arithmetic: You reach the break-even point when your gross profit equals all remaining business costs.

3. Realize that you can’t make up in volume what you lose in profit — so price accordingly.

One of the great myths in business is that by offering lower prices you will attract more customers and then, down the road, you can raise your prices. Without proper profit margins, you will not generate the cash flow to stay in business. You can’t be all things to all people. It is far more important to establish a clear and unique value proposition, then price your goods and services accordingly.

4. Build your financial team.

Waiting until you make money to put together a financial team is like waiting until you lose weight before you start an exercise program. A good bookkeeper, controller, CFO, CPA, financial advisor, etc… can help you make money, and more importantly, help you keep it! A word of warning: You can delegate to your financial team but do not abdicate.

5. Find a mentor or business coach.

Even if you’re sure you don’t need one, find at least one mentor or coach, and be willing to listen. Ask him or her to review your budget, projections, marketing plan, targeted customer profiles, and, most importantly, your assumptions.

6. Conquer your fear of financials.

No matter what your native language, the financial language of business is foreign. Learn the language or get an interpreter you trust. Though you’ll rely heavily on your financial team to create reports, build time in your schedule to review and understand the reports. For sure you will look at your daily sales and cash balances. Look, too, at your weekly cash flow, break even, and monthly income statement/P&L statement, balance sheet, and variance reports. Conduct both a sniff test (if it doesn’t smell right then there’s probably something sick and wrong) and a random integrity check.

Sound daunting? It’s only the beginning. But if we only thought about dirty diapers and crying kids, we’d never have babies. The same is true with starting a business, there’s a lot of crap, but there’s a lot of joy to be had as well.

For those of you who have started businesses — what were (or are) your greatest challenges?

Finally!  The SBA (Small Business Administration) is loosening its grip and providing microloans of up to $50,000 to small businesses.  In fact, the average microloan is $13,000.  For some small businesses, that can make the difference when surviving a slow economy.

In an article published on Saturday, Oct. 16th in the L.A. Times titled “U.S. gives small firms more access to microloans, Eric Zarnikow, who helps run the Small Business Administration’s loan programs says that for every loan, 1½ jobs are created or retained. When you consider that 80% of all businesses today have fewer than 10 employees, microloans play an important role in job creation…one loan and one job at a time.

Although the cost for lending microloans is more expensive than loaning larger amounts of money, it does seems that the SBA could find a better interest rate than 8 – 13% – especially in this economy. Even so, if you want more information about microloans for your mighty microenterprise, visit the SBA’s Microloan Program to find an approved intermediary in your area.

Core Business Assessment


Brooke Billingsley

Vice President
Perception Strategies

Synnovatia is a strategic coaching firm that is detailed and knowledgeable about business. i have a small business that grew from $150K to $750K because of the goal setting and resources that Synnovatia provided. It saves me years of learning on my own.

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