One of the many key tools you have which measures your business performance is the profit and loss statement. It can provide insight into your costs, profits, expenses, revenue and much more! As an entrepreneur moving into an MSP startup, understanding your financial documents is essential. The profit and loss statement is your first and most easily accessed tool.
What is a Profit and Loss Statement?
We might also call this a P&L, which you will probably hear a lot if you haven’t already. This statement will provide for you categories of numbers related to your revenue and expenses. The profit and loss statement also has a time characteristic. They are usually generated for a financial period such as a month, quarter, or year. Let’s go into what categories comprise the statement and why they are very important.
Most bookkeeping software tools consider these “accounts”. The use of these accounts are to distinguish different types of income and expense.
Using all these accounts we can take our revenue from labor and product sales, which is called Gross Revenue. Then we subtract the cost of the goods which we resell, which gives us our Gross Profit. From there we subtract all our expenses and arrive at a Net Profit, which should be a positive number!
Importance of Accounts
Accounts are important to be able to identify where your business is being successful and where it isn’t. The fewer accounts you have, the harder it is to see specifically where you are having problems. If you are undercharging for video extension cables, but you have them lumped in with the backup cloud subscription you resell will be very hard to find unless you split those into Inventory and Software as a Service accounts.
For example, you might have an account for all the money made by providing labor to configure and install desktop computers. This account should be seen in the revenue side of the profit and loss statement.
An example of a resold item, which has two components – the revenue account and the expense account. Software as a Service is one such type of offering which is going to have a couple different entries. One is for the expense of the SaaS product, and the other is for the money made by selling it. The expense part is considered a Cost of Goods Sold (COGS) and has an important place in the profit and loss statement. So we will have a SaaS account for this COGS expense. Of course, we also have a revenue account for the money we earn from selling the product.
This is important because you want to ensure you are making adequate profit from your resold items. In the Profit and Loss, you’ll determine your gross profit before regular expenses by subtracting the Cost of Goods Sold accounts like that account the SaaS expenses go into.
There are numerous strategies on how to build accounts for your business (your chart of accounts). Some business owners will create an account for each service and product they offer. This can provide very detailed reporting on performance. Adding that level of detail after you have been in business for years can result in a lot of bookkeeping time. When you are starting or beginning a transition to MSP is the best time to look and make the appropriate changes.
Making Sense of the Statement
A single profit and loss statement can tell you about your performance for the period being measured. What makes this even more powerful is when you compare it against a prior period to see performance over time.
The most popular bookkeeping software packages give you a report which can compare the previous period. The feature is a must-have for the MSP startup to closely monitor the business finances and ensure there’s no surprises when it’s time to pay staff, or yourself!
You will be able to ensure that your prices are keeping up with your costs. You may also learn that you need to adopt new ways to charge customers for hardware you deliver before being paid for it. Monitoring our P&L led to some changes on asking for deposits on large purchases.
You can start using KPI’s (Key Performance Indicators) to help you make hiring decisions when your recurring revenue from MSP contracts is high enough. It’s one thing to have a “feel” for when you need to hire, but the hard numbers can be reliable proof.
When you delegate responsibility in your business, you might not have day-to-day knowledge of each of your expenses. Checking in on your profit and loss statement comparison on previous periods might see increasing costs to address.
The profit and loss statement provides key data in creating a cash flow and KPI’s to ensure your business is maintaining performance objectives, and profit goals.
The profit and loss statement is one of the most important tools you have to monitor your businesses’ financial health. Understanding how it works and what the numbers mean is a key skill that every entrepreneur needs.