Financial Planning

The truth about your P&L. Numbers never lie

 

Those that do not learn from the past are doomed to repeat it.  Heard that one before?  Your P&L (profit and loss) statement is an honest-to-goodness, no holds barred account of how your business performed over a predetermined period.  It is a record of fact and leaves very little room for ambiguity.  After all. Number never lie.  However, if you squint at them, in a certain light, you can fool yourself into thinking they are a little more favourable than what they really are.  But that’s our fault, not theirs.

We always talk about understanding your numbers so that you can have a solid grounding in what has worked for you and what looks like it could have been done better.  But the real beauty of the numbers that make up your P&L, is that in the right hands, they can map a path to where you could take your business, not just where it’s been.  While it’s stressed in the pages of many an investment prospectus, that past performance is not a true indicator of future earnings, past performance is still a wonderful tool.

Give it to me straight P&L, how’d we do?

A P&L doesn’t sugar coat anything.  That’s the first thing you need to realise – and appreciate.  For the unvarnished truth, a mirror to hold up to your business, nothing really comes close to the P&L.  

The assumptions and truths (real and imagined) you build upon that most honest of foundations, is where the fork in the road appears and self -deceit muddies the waters.  You end up saying things like, “yeah sure, premium travel and massages represented a 25% increase in total costs BUT we’ll make that all back and more when our very impressed clients start queuing up for our services”.   You are dreaming – and wasting money.  That’s not how Cash Rich Businesses remain so, that’s how ego ends up sinking, or at the very least, hampering your profit-making potential.  And your P&L will reflect the damage, poor decision-making has done… without blinking… and with no apologies – a true friend.

On the other hand, you will also see how a 25% increase in staff performance-based bonuses led to a 55% increase in new revenue.  At first glance, the signs are all there, without additional noise or complication, terrific!  Of course from here, due diligence dictates that you investigate the cause and effect relationship more closely to ensure that it is what you think it is.  The good thing is that now, you’ll be fishing where the fish are as opposed to randomly dropping a line somewhere in the Pacific and hoping for the best.

Tell me, P&L, should I stay or should I go?

Thinking of expanding, making a play for a foothold in another territory or service offering?  A well prepared, honest-as-the-day-is-long P&L will tell you when and how much.

For example, how much cash on hand did you have to get you through the lean winter period as an ice cream shop owner?  What was your return on investment when you forked out additional advertising when the new apartments went up nearby last spring?  How much tax did we end up paying?  Really?!  Maybe it is time to time to talk to the good people at Inspire.

So, your P&L may not tell you how many storeys high your empire will be, but it will tell you, in no uncertain terms, how strong the foundation is.  Remember, your P&L is your pal and numbers never lie.