Bob Gauvreau walks through how to read your profit and loss statement to spot what's actually wrong. Watch your gross margin for rising material costs or labor waste, check that overhead stays flat, and make sure net profit tracks with revenue. A 12-month P&L tells you whether you need to raise prices, cut costs, or both.
Chapters
How to identify and address financial challenges in your business. Really, if you're a business owner and you want to make sure that you're identifying any of these situations that are maybe arising in your business, it all comes down to the foundation of making sure your numbers are up to date and accurate. Because if your bookkeeping is not up to date and accurate, you have no idea how your business is performing. And one of the ways that I like to look at a business is in their up to date financial statements is to look at a picture of a profit and loss over a period of time. And I would suggest, you know, the last 12 months looking at a profit and loss, identifying the three elements that are in any financial model. Revenue, cost of delivering that revenue, and overhead costs. And what you can look at in there is one, your profit margin. If your gross profit is continuing to drop, that's when you're having issues that could turn into long term issues inside your business. We want to make sure that your profit margin is continuously maintained if not going up. And here's a couple ideas for you. If your profit margins are dropping, either your material costs are going up, which should signify you have to increase your prices, your labor is becoming inefficient, or there's waste or spoilage in whatever costs that you're delivering on those revenues. So if our margins are dropping, the number one thing we need to look at is our pricing strategy and how we can introduce increased prices to maintain or increase our gross profit margin. The second is again, over a period of time, you can see a pattern is looking at our overhead costs, the total overhead costs at the bottom, which is a summary of all of those expenses. As you watch them, they should be flat. If you continue to see them going up over time, there's a challenge with your overhead creeping up, which is going to cause lack of profitability at the end of the day. And between those two, you're going to identify opportunities in your business to improve, but you're also going to identify issues that are happening within your business. And then lastly is looking at the bottom line, profit in the business, which is once you understand your gross profit and your overhead cost, it's purely a volume gain. So if your revenue is continuing to drop down and you're not reducing your overhead costs, your profit, your bottom line profit in your business is going to go down, if not zero or negative. So those are the main areas you need to focus on in your business to identify opportunities and potential issues that are coming down the road.
