July 27, 2020

How to manage profit and loss management?

What is profit and loss management?

Profit and loss management merely is managing the income of a business to ensure a net operating profit. This is critical to accelerate the company’s profitability and to monitor their performance and how to improve it. This management technique has several advantages to allow the business to develop and grow.


Techniques for managing profit and loss management


1. Create Profit and Loss Statements

Many businesses produce a profit and loss statement; this can be conducted weekly, monthly, quarterly or annually. Creating a profit and loss statement demonstrates the income and expenses of the business. This allows the business owner or accountant to analyse the business clearly. This helps the business for potential investors or lenders, as financial reporting an original and reliable document.

2. Compare Profit and Loss Statements

Once the business has several profit and loss statements, a comparison can be made. This helps to identify the businesses peaks and declines throughout the year or quarter and helps the business create steps appropriate to their situation.

3. Positive changes to business finances

This management technique allows a business to make the necessary improvements to improve a financial situation. For example, this allows the business to be more innovative and efficient to drive sales potentially.


4. Meet with Accountant

Regular contact with an accountant is highly beneficial, as the accountant can help further with profit and loss management and decision-making. Also, if the businesses are making a constant loss of profit, the accountant is beneficial to have in order to find weak expenses of the business.


What are the advantages of Profit and Loss Management?  


1. A strong foundation for Forecasting

Forecasting needs a strong foundation; managing profit and loss create this foundation. A business can create a detailed forecast using recent trends and anomalies that have been found in the profit and loss data. This forecast created depicts a more accurate prediction into the businesses future and can compare this to competitors.

2. Monitored progression

A record of profit and loss management allows the business progress to be monitored. This allows the business to undertake any changes or improvements, as this is supported by profit and loss data. This can be instrumental for the business to track their progress and have permeant records.

3. Creates a net profit ratio

Profit and loss management determines the net profit of a business in a certain period of the year. Therefore, this obtains the net profit ratio (Ratio between net profit and sales). This helps businesses to track and monitor their net profit more efficiently.

Net Profit Ratio = Net Profit/ Net Sales.


4. Significant assistance in Decision Making

Profit and loss management provides a more accurate representation for decision-making. Profit and loss data can create a reliable source when making businesses decisions.

5. Helps to control indirect expenses

This management technique allows a more detailed overview of income and outgoings. This helps to control any unnecessary expenses in order to improve the profitability of the firm.



The Importance of Profit and Loss management

In order to have a healthy and long-term business, profit and loss needs to be managed and monitored. This management technique aids business strategy and decision-making, proving its critical need for the longevity of a business.

For further advice, see the below links:

https://www.business.org/finance/accounting/how-to-effectively-manage-your-companys-profit-and-loss/

https://www.freshbooks.com/hub/reports/profit-and-loss-report

https://paysimple.com/blog/how-to-analyze-a-profit-and-loss-pl-sheet/

https://www.smallbusiness.wa.gov.au/business-advice/financial-management/reviewing-your-finances



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