Chapter 2

Understanding Your P&L

In This Chapter

  • Getting better acquainted with your P&L
  • Matching up the P&L with your business model
  • Being clear on profit and loss issues
  • Analyzing profit performance
  • Exploring ways of improving your profit performance

Small business owners must know whether they're earning a profit. You need to make a steady profit to survive and thrive, after all. So, you'd think that the large majority of small business owners would be pretty good at understanding and analyzing their profit performance.

The evidence suggests just the opposite. They generally know that profit information comes out of their accounting system. But accounting reports are in a foreign language to many start-up business owners. They don't do much more than glance at the bottom line. And a quick peek at the bottom line is no way to keep your business profitable and growing.

Profit is a financial measure for a period of time — one quarter (three months) and one year are the two most common periods for which profit is determined. At the end of the period, your accountant (often called a controller) prepares a financial statement, known as the P&L (profit and loss) statement, which reports the amount of profit or loss you made and the components of your profit or loss.

A good part of this chapter explains this profit performance financial statement. You should thoroughly understand this accounting report. You can't afford to be fuzzy on this financial statement. There's no other way ...

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