In order to conduct a successful business, profit and loss management is necessary. By definition, profit is the gain after all expenses are subtracted from the total amount received. On the other hand, loss is an amount by which the cost of a product/service/good exceeds the selling price. Therefore, it is crucial that every company keeps track of its spending and earnings, to make sure that the total balance is positive and ensure its continuity and ability to compete in the market.
- Financial assessment: the first step to manage the profit and loss is the financial assessment. This process consists of comparing the current profit and loss to the ones that were made during the last 2 years, using the company’s data. In this manner, accountants can have a clear idea about the numbers and can set some benchmarks accordingly.
- Analytical tools: every company should have an analyst to help it create an income statement, which is an analytical tool. The latter represents the costs as percentages of sales, thus allowing the company to know which costs should be cut out of the process since they lead to decreasing the profit margin. This analysis should be performed in comparison with the last 3 years; a detailed comparison for each year shows the expenses as percentages of the revenue. In this way, companies can have a clear idea about the detailed numbers, allowing it to manage the whole process. Keep in mind that expenses like the rent and utilities must remain the same throughout the years.
- Expense growth analysis: analysts should also help the company understand the increase in expenses over the years. This process can help assess valuable data about how can the internal and external factors affect the increase in costs as a percentage of sales.
- Sales review: after reviewing the company’s sales, the numbers might show that the expenses still exceed the profits although all necessary measure have been carried out and all costs have been well managed. This may appear due to some unprofitable products or services or some stagnation in the general economy. The company can then take some actions, such as selling some properties or assets, stop the production of some products with low or no profit at all and stop investing in non-profitable projects.