The primary function of profit and loss (P&L) statements is to show the profitability of your company. If your business hasn’t been making profits, you can use your P&L to understand why by looking at the revenue coming in and expenses being spent. In short, the P&L takes all the income and subtracts all expenses.
So how do you know if your P&L is accurate? P&Ls may seem daunting, especially if you’re not the best bookkeeper. Let’s start with the basics.
- You have negative cash.
If your P&L is showing a negative balance, this should be a big red clanging bell warning. Your bookkeeper, accountant, and banker will never let your checking account be in the red, especially by hundreds or thousands of dollars. Zero money is the least amount you should ever have in your account. More than likely, your bookkeeper has printed checks but is waiting to send them until the cash comes in.
- A balance sheet doesn’t balance
The proof is in the name: a balance sheet is called a balance sheet because your assets must equal or balance your liabilities plus net worth. If your balance sheet doesn’t balance, someone has entered the wrong information.
- Your inventory value is even or doesn’t change
A dead giveaway your P&L is not accurate is an even inventory value. If your value is exactly $30,000 and has been that way for months, someone is guessing at your value and hasn’t bothered to track the inevitable inventory changes you business has month-to-month.
- You have negative taxes payable
The government owes you money? Not likely. But that’s what a negative tax payable balance means. Someone on your accounting team has not followed procedures correctly, or your payroll taxes are late. If you find you have negative taxes payable, make sure your taxes are being paid.
- Inconsistent gross margins
Your gross margins should be consistent if your pricing is consistent. With the exception of busier times, if your margins grow more than 2% per month, something is wrong. During busier months, you can expect your gross margins to drop slightly.
If you find your profit and loss statements are inaccurate, you may want to consider getting a new bookkeeper or accountant. If that’s the case, consider a virtual accountant. If you have questions about using a cloud for your accounting needs, contact us. We’re happy to help you and your business, and we’re here to help you succeed.