Reading The Story Of Your Company: 5 Things You Should Learn Just By Looking At The P&L

by | Jun 20, 2016 | Bookkeeping

5 things you should learn

Every company has a mission and purpose that it delivers to the world.  The importance of delivering value to your client’s is vital.  However, behind the mission of a business is the true story of the business.  This story is not written by the Marketing department and is certainly not written with words.  This story is written in numbers and told through specific metrics.  The storyteller is the Profit & Loss Statement

To the experienced eye, the Profit & Loss (P&L) Statement, also known as the Income Statement, gives several insights into the inner workings of any company.  But you have to know what you are looking at and what to look for.  A qualified eye saves a lot of time.  As Warren Buffett says, “Risk comes from not knowing what you’re doing.”  Bookkeeping services offered by a big accounting firm are a great place to start.

A good manager should be able to answer these key questions from reading a P & L statement.  If you have trouble with the followings, you should seek excellent bookkeeping services immediately.

  • Is Your Company Making Any Money? Not You, Your Company.

While it is tempting to begin with looking at Top Line Revenue, and of course the salary that you pay yourself, a more important number to look at is at the bottom of the Statement.  Revenue and sales are the lifeline of your organization, but you need to make sure you are not using up all of this vital nectar.

After all of the taxes, salaries, costs have been paid, are there any retained earnings for reinvestment?  Your revenue can be increasing, but if you have no money left over to increase sales, your business is at a standstill.

  • Have You Priced Your Services or Goods Correctly? The COGS of Your Business Wheel

 

One of the biggest contributors to a healthy bottom line, is accurately pricing your cost of services or Cost of Goods Sold (COGS).  When you are first starting out, you generally price based upon market research.  But once you start selling and accounting for overhead, you can better understand the true impact of your costs.  Bookkeeping services from bookkeepers in Park City and the Big Accounting firms can help you track this for you with a detailed eye.

 

The percentage that COGS eats into your retained earnings can be measured through two metrics in particular.  Gross margins and Operating Margins

 

  • Are Your Gross Margins Healthy?

Gross margin represents the percent of all sales that the company retains after accounting for the direct costs for producing those goods and services.  In other words, after you sell $100 worth of pens, and those pens cost $50.00 to make, then the company retained $50.00 of profit.  In this case, the gross profit margin is 50%.  That would be a VERY healthy margin.  If the margins where too slim, that would indicate that you should appropriately lower the COGS or perhaps competitively increase the price of the product.

While this is a great metric for knowing how to price and source items for your business, this does not tell you how efficient your company is overall.  To understand that, you have to know the Operating Margin metric.

 

  • The Most Important Metric? Your Operating Margin

Your Operating Margin tells you how much of total revenue is retained after you account for the cost of goods sold and your overhead expenses.  In other words, if you sell $100 worth of pens, and those pens cost $50.00 to make, and you have $30.00 of overhead, you have an Operating Profit of $20.00, or 20% Operating Margin.

 

You can study the Operating Margin of a company to know if overhead is getting “too heavy”, if salaries and commissions are eating too much into profit, and pretty much everything about the performance of a company.  Knowing this metric and studying its history will tell you the full story of a company.

 

  • How Credit Worthy Is Your Company? Where’s The Value?

Once you know the metrics and the numbers of a company, you can then determine “Is this company credit worthy?”  “Can I actually go out and borrow money to fuel growth?  Or am I just borrowing time before my Operating Costs eat more revenue?”

If you are looking at investing into, or acquiring a company, you can look past Top Line Revenue sales and at the Operating Margin to see where the opportunity is.

Shark Tank is a great show because each entrepreneur tells the story of their company while the “sharks” want to know the numbers story.  And the numbers don’t lie.  Know your numbers to know your business.  If you have trouble compiling a P&L Statement for your company, or reading one without your eyes getting crossed, seek out professional bookkeeping services.  If you don’t know your numbers, you don’t know your business.