Reviewing Profit & Loss Statements
One of the most important financial reports to be periodically reviewed is the Profit and Loss Statement. Whether you are the business owner, accountant or bookkeeper assigned to this task, you should always make sure that this report is periodically reviewed. A monthly review is reasonable after the month-end accounting transactions cut off and of course, when all the routine monthly tasks are made including the monthly adjusting entries.
As a business owner, the more you have to make sure you have done the periodic review of the monthly profit and loss. It is not enough that you have devoted much time to generate sales and grow your customer base, or even beat or be on the lead among the stiff market competition. Reviewing the profit and loss statements periodically is equally important to making the business grow and evaluate the profitability of the business as well as evaluating adherence to prescribed operating budgets and ascertain reasonability of the setup budget and the need to increase or decrease these budgets especially for those uncontrollable and controllable costs based on the evaluation of the profit and loss report. When you have done the review periodically, this will also make you ask questions to the accountant or bookkeeper. There are times that the accountant or bookkeeper have errors or omission in recording accounting transactions, which could affect the profit and loss statement.
When you are reviewing the profit and loss statements, it is best that you compare the current month profit and loss from the previous month or all the previous months of the accounting year. This will give you an eagle’s eye view of the business profitability as you will be able to compare the profit and loss items for increase or decrease in profits. In real life business world, not all increases in sales mean that profits are also increased. These increases in sales are always associated with sales and marketing expenses on gaining new markets and customers. Business decision-makers might cut down on operational costs but also increase the sales and marketing costs in the process. Based on this real business world scenario, review of the profit and loss lay the groundwork for a more informed business judgment to making the business grow as it should.
If you are the company bookkeeper or accountant assigned with the task of reviewing and submitting the financial reports, you have to do this task periodically, preferably on a monthly basis. Reviewing the profit and loss before submission to management also gives you the leverage to review the financial statement. Most often, this help you to identify errors or omissions in recording. Take for instance, the delivery expense or freight out account have increased by 50% than the previous month profit and loss data but the sales is only increased by 2%. This for sure will raise questions, you have to review the general ledger entries. Most often, this would need correction or reclassification entries if there is a material amount of transportation costs for importing unsold products that is already charged to this month’s cost of sales or taken up as period costs.
Reviewing the profit and loss statement not only result to discovery of mistakes or errors but also as a basis of effectively evaluating the business operations and its profitability to make informed sound business judgment for maximizing profits.