Build Your P&L by Design, Not by Chance
Build Your P&L by Design, Not by Chance
Don't wait until year end to find out how profitable you've been.
By then, the opportunity to influence the results has often passed.
But what if you did things differently, what if you could create the version of your business that you are aiming for?
What if you decided at the start of the year exactly how much profit you wanted to make and built your Profit & Loss (P&L) report around that goal?
This is something larger businesses do all the time. They have budgets, forecasts and entire finance teams dedicated to monitoring performance. Small businesses can do the same and should. Your numbers are just as important.
Start with the Profit You Want to Make
Let's say you'd like your business to generate £50,000 profit this year.
The next step is to consider your overheads.
Let's say your total annual overheads are £60,000.
To make a profit of £50,000, your business first needs to generate enough gross profit to cover those overheads.
Desired profit: £50,000
Plus overheads: £60,000
Required gross profit: £110,000
Next, we need to add in our cost of sales.
Let's assume these costs total £20,000 per year.
Required gross profit: £110,000
Plus cost of sales: £20,000
Required annual sales: £130,000
Suddenly, your target becomes much clearer.
Rather than simply hoping for a profitable year, you now know that you need to generate approximately £130,000 of sales to achieve your profit goal.
Turn Your Ideal P&L into a Monthly Budget
Once you've built your ideal P&L, it becomes your benchmark.
You can then divide these annual figures by 12 to create a monthly budget and compare your actual performance against it every month.
By reviewing your actual performance against your monthly targets, you can ask:
Are we on track?
Are sales increasing?
Are expenses creeping up?
Are we likely to achieve our profit target?
Even if sales are improving, you may still not be on track to achieve the level of profit you want.
Once You Know Your Target, You Can Make Better Decisions
Knowing the level of sales you need to achieve allows you to start thinking strategically.
Ask yourself:
What is currently working well?
Can we do more of that?
Do we need to introduce a new product or service?
Should we review our pricing?
Could we improve our marketing activity?
As small business owners, we're constantly coming up with new ideas.
We get that dopamine hit from a new concept and want to start working on it immediately.
But not every idea should be implemented straight away.
Completing this exercise can help you establish whether a new idea actually makes sense financially.
Use Your P&L to Challenge New Ideas
Larger businesses often have boards of directors and senior management teams to challenge ideas before resources are committed.
Most small businesses don't.
Often, it's just us.
That means we need to challenge ourselves.
Before pursuing a new idea, ask yourself:
Will this drive sales?
Will it improve our brand?
Does it support our current business goals?
Do we have the capacity to deliver it?
If it's successful, what does success look like?
Will it improve the customer experience?
What would need to be put on hold to make this happen?
There is always an opportunity cost.
If you choose to focus on one thing, you're choosing not to focus on something else.
You could even plug your new idea into your ideal P&L to assess its impact.
You may decide that now isn't the right time. You might choose to park the idea, continue focusing on what's already working and revisit it later.
Or you may conclude that it's exactly the growth opportunity your business needs.
Either way, you're making a considered decision based on data rather than excitement alone.
None of this works without accurate, up to date bookkeeping.
To compare your actual results against your benchmark, you need bookkeeping records that are current, accurate and complete.
If your bookkeeping is months behind, your P&L becomes largely meaningless because you're making decisions based on outdated information.
Regular bookkeeping means you always have access to current, meaningful figures that can help you make informed business decisions today.
Take It One Step Further with KPIs
Once you're reviewing your monthly results, you can take things a step further by tracking key performance indicators (KPIs).
For a service-based business, these might include:
Revenue per client
Average monthly recurring revenue
Client retention rate
Gross profit margin
Average invoice value
Number of new enquiries each month
Conversion rate from enquiry to client
Billable hours versus non-billable hours
Average debtor days (how quickly customers pay)
Tracking KPIs alongside your P&L provides an even deeper understanding of business performance and highlights areas for improvement.
In Summary
Your P&L shouldn't simply be a report that tells you what happened last year.
It should be a roadmap for where you want your business to go.
By building your P&L by design, rather than leaving profit to chance, you move from being reactive to proactive.
Larger businesses do this every month.
Small businesses should too.