When I ask business owners if they know their profit and loss for last month or this year-to-date, I am so surprised at how many say they don’t know. Are you also that last-minute business owner who waits until the end of the year to catch up on your books?
Keeping tabs on your monthly profit and loss is crucial for many reasons. What are the advantages of keeping up monthly instead of waiting until the end of the year?
1. Increase Profits
Regularly monitoring your P&L helps you assess the overall financial health of your business or personal finances. It provides a snapshot of your income, expenses, and profitability, allowing you to gauge your financial stability and make effective changes that will improve your bottom line.
2. Effective Decision-Making
A monthly P&L statement provides valuable insights that can aid in decision-making. Whether you're a business owner or managing personal finances, understanding your profit and loss helps you make informed decisions about budgeting, investments, and future financial and business strategies.
3. Identifying Trends
Regular monitoring of P&L statements allows you to identify trends in your income and expenses. Recognizing patterns over time can help you anticipate financial challenges or opportunities, enabling proactive adjustments to your financial strategy.
4. Performance Evaluation
Tracking monthly P&L helps evaluate the performance of different departments, products, or services. It provides insights into what aspects of the business are contributing the most to profitability and where improvements or adjustments might be needed.
5. Tax Compliance
Understanding your profit and loss is essential for tax compliance. Up-to-date financial records are necessary for tax returns and preparing for your expected tax liability at the end of the year. A monthly P&L statement can streamline the process and avoid last-minute adjustments and catchups.
6. Early Detection of Issues
Regular monitoring of P&L can help you identify financial issues or challenges early on. Whether it's a decline in profitability, unexpected expenses, or declining sales, early detection allows you to address issues promptly and prevent them from escalating.
7. Saves Money
Knowing your monthly profit and loss helps you manage your finances more effectively. It enables you to allocate resources efficiently, negotiate better terms with suppliers, and optimize your overall financial strategy.
In summary, understanding your profit and loss on a monthly basis is a fundamental aspect of effective financial management. It provides the information needed to make informed decisions, plan for the future, and ensure the financial health and sustainability of businesses.
I don’t have time, how can I keep up monthly???
Keeping up monthly is vital to your business, but, as a business owner, it’s hard to find the time. Hiring a bookkeeper will not only save you valuable time but will save you money by helping you make effective and timely financial decisions. It also saves you money from having your CPA fix mistakes or ask you questions.
What monthly reports do I need?
To be most effective, make sure your bookkeeper provides you with monthly financial reports. These should include profit and loss (both year-to-date and monthly comparisons) to help keep up on changes that are happening in your business. You also need monthly and year-to-date reports showing percentages of your income and expenses to help you see where you are overspending and underproducing.