How to Use a Profit and Loss Statement to Analyze Your Business

May 14, 2023

A profit and loss statement (P&L) is a financial statement that shows your business's income and expenses over a specific period of time. It can be a valuable tool for understanding how your business is performing and identifying areas where you can improve.

One way to use a P&L statement is to calculate the percentage of income that is spent on various parts of your business. This can help you to see where your money is going and identify areas where you may be able to cut costs.

For example, you might find that you are spending 30% of your income on labor, 30% on operating expenses, and 30% on cost of goods sold (COGS). This would leave you with a 10% profit margin.

The following are some recommended ratios for different parts of your business:

Labor: 25-35%. This includes the salaries and wages of your employees, as well as the cost of benefits such as health insurance and retirement contributions.
Operating expenses: 25-35%. This includes expenses such as rent, utilities, marketing, and office supplies.
COGS: 25-35%. This includes the cost of the raw materials and supplies that you use to create your products or services.
Profit: 10-20%. This is the amount of money that your business makes after all of its expenses have been paid.

Of course, these are just general guidelines. The specific ratios that are right for your business will depend on your industry and the nature of your operations.

Another way to use a P&L statement is to benchmark your business against other businesses in your industry. This can help you to see how you are performing relative to your competitors and identify areas where you need to improve.

There are a number of websites that offer benchmarking data for businesses in different industries. You can also contact trade associations or other organizations in your industry to get this information.

By using a P&L statement to analyze your business, you can gain valuable insights into your financial performance and identify areas where you can improve. This information can help you to make better decisions about your business and achieve your financial goals.

In addition to the above, here are some other things you can do with a P&L statement:

Track your business's financial performance over time.
Identify trends in your income and expenses.
Set financial goals for your business.
Make informed decisions about pricing, marketing, and other aspects of your business.

A P&L statement is a powerful tool that can help you to understand and improve your business's financial performance. By using it wisely, you can make better decisions that will help you to achieve your financial goals.