Manage Your Money to Stay in Control of Your Business.
Imagine Funmi & Family Furniture, an artisanal, family-run furniture shop that creates custom chairs, tables, and more. Funmi runs the business with her husband and their daughters, all of whom love designing and building custom furniture. The business has brought the family closer together, so it’s definitely a success in that way.
Funmi wants a better understanding of whether the family business is a financial success, too. What’s the best way for her to keep track of whether her business is successful?
How do you know whether your company is profitable or losing money? You can’t rely on your feelings or perceptions about how the company is doing.
Instead, you need to depend on facts-specifically, the fact of whether your business is making a profit or suffering losses. To figure out which of these it’s doing, you’ll want to create a profit and loss (P&L) statement.
The profit and loss statement is a recap of your company’s income and expenses over a specified period of time. This period can be monthly, quarterly, or annually. To create your profit and loss statement, first you need to know what profit is, which is revenue minus expenses. But what is revenue?
Revenue is the income a company receives, often from selling goods or services. Some companies also make revenue from other areas, such as rent collected from subleasing some of their space, or by selling used equipment.
Once you’ve listed your company’s revenue, total up any expenses incurred to produce that revenue. For Funmi & Family, expenses might include the cost of wood and nails, wages for employees, rent, and repairs for equipment. Even if you haven’t yet paid for an expense – say you owe rent or your employees’ payday is coming up – you should still take it into account. Separate your expenses into various categories to better see how your money is being spent.
Typical categories of expenses might include: Operating expenses i.e. Cost of goods sold, payroll, marketing, and overhead (rent, utilities, insurance, etc.)
Non-operating expenses i.e. Interest for debt, such as bonds, loans, lines of credit, etc.
By creating a profit and loss statement, you can get a better picture of whether or not your company is making money and, if so, how much. This can help you make adjustments to your business practices, such as what you spend money on to run your business. If Funmi learns she’s making a huge profit, she might invest in that nice, big table-saw she’s had her eye on.
Knowing profits and losses can help you plan for the future – what can you spend more on to grow your business, or what might you cut back on to keep the business running? It can affect how you price your products, too.
If Funmi’s increase in profits is because she’s found a way to save on expenses, she might pass those savings onto her customers by offering a sale on chairs that actually generates more profit through increased sales.
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Once you’ve listed everything out, you’re ready to record your profits or losses. To calculate this, take your revenue and subtract your expenses from it.
If revenue minus expenses is positive, this is your profit. If revenue minus expenses is negative, this is your loss. Calculating and recording profit or loss periodically will let you compare periods and allow you to analyze trends.
As you analyze, consider if decisions you’ve made for your business are working. If Funmi & Family rents a huge billboard one month, they should ask if this generated revenue and led to profit, or if an increase in expenses led to loss.
LISTEN UP: It’s important to track and review your income and expenses so you can plan ahead for future growth.
If you have any concerns about creating or understanding your income statement, consider working with an accountant or other financial specialist.
As a practical matter, you may be able to generate your profit and loss statement automatically.
Accounting systems like QuickBooks allow you to enter your revenue and expenses into a digital program that generates a profit and loss statement for you.
With these programs, you can enter information that lets them automatically know what’s revenue and what’s expenses, and can connect your bank account or digital payment platform to streamline the process even more.
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