With an understanding of the data included in the Profit and Loss report, you're ready to analyse it. Knowing what to look for and how to interpret it is important. It is the key to understanding business performance.

The more detailed the Profit and Loss report is, the better you can see how your revenue splits out. For example: by product or division. It shows you where your costs are. This helps you make more informed decisions about spending. Spend more where profit is greater or spend less where profit is lower. Set up analysis types in Accounting to provide this level of detail.

Where to look to reduce expenses

You may be selling your goods at a higher price than you are buying them. When you factor in all your overheads, you may be losing money. Having products or services that aren't profitable enough can cause you to look for ways to cut costs. In most cases, overheads are the best place to start.

Year-on-year comparisons

Comparing periods can help you gauge the progress of the business over time. Look at drastic changes, like a drop in sales. Identify trends to determine where your business is heading. You can measure the success of your strategies. Determine if revenues are growing faster than expenses by comparing annual performance.

Often, investors and lenders use the Sales value to determine the size of a business. They can see whether it is growing or declining over time.

Evaluate margins

Sales

Analyse the months when your sales are high. What are some of the factors that drive success? What about marketing, for example? Did this increase sales? Do your sources of income have the potential to survive over the long term?

Expenses

Can you reduce expenses? What are your biggest expenses? Is it appropriate for your business?

Net Profit

Positive Net Profits are essential to the viability of any business. You can't sustain Negative Net Profits without further investment.

Forecasting and budgeting

Use the Profit and Loss report to help project future cash flows. Look at previous year comparisons. With forecasting, you can make the most of the good months while surviving the bad ones.

For a project-based revenue stream, it is imperative to continually modify your budget. This prepares you for any cash flow gaps between projects.