Week 2: You Have Money in the Bank—But Is Your Business Actually Profitable?

You check the business bank account and there's money there.

That's good. But it doesn't necessarily mean the business is profitable. Your bank balance tells you how much cash you have at a particular moment. It doesn't tell you how much you earned, how much it cost to generate that revenue, or whether your expenses are consuming too much of what you're bringing in. For that, you need your Profit & Loss statement.

What Your Bank Balance Doesn’t Tell You

Let's say your business has $50,000 in the bank.

Some of that money may already be committed to payroll, rent, taxes, loan payments, vendor bills, or other upcoming expenses. You may also have recently received a large customer payment, borrowed money, or contributed personal funds to the business. Those transactions increase cash, but they don't necessarily increase profit. That's why managing a business based primarily on the bank balance can be misleading.

What Is a P&L?

Your Profit & Loss statement, also called an income statement, shows your company's financial performance over a specific period. At its simplest:

Revenue: Money earned from selling your products or services

minus

Cost of Goods Sold (COGS): Direct costs associated with producing or delivering what you sell

equals

Gross Profit

Then:

Gross Profit

minus

Operating Expenses: Payroll, rent, insurance, software, marketing, professional fees, utilities, and other costs of operating the company

equals

Net Profit or Loss

That's your bottom line.

Don't Stop at Net Profit

Knowing whether you made money is important. Understanding how you made it is even more useful. Suppose your revenue increased 20% this year, but your net profit barely moved. Why? Maybe labor costs increased. Maybe your cost of materials increased and your pricing didn't. Maybe overhead grew faster than revenue. Maybe one service generates considerably better margins than another. Your P&L gives you a place to start asking those questions.

You can also calculate your gross profit margin:

Gross Profit ÷ Revenue

If you generated $500,000 in revenue and $200,000 in gross profit, your gross margin is 40%. That number becomes much more useful when you compare it with prior periods, your budget, and relevant benchmarks for your industry.

Can You Answer This Question?

What was your company's net profit last month? If you know the answer, here's the next question: Why was it that amount? A good set of books should allow you to answer both.

Pull your most recent P&L and look at it beyond the bottom line.

Compare revenue with the previous month or quarter. Look at your largest expenses. Review your gross margin. Look for expenses that have increased significantly. The goal isn't simply to produce a P&L for your accountant at tax time. It's to have financial information you can actually use to run your business.

Let's talk.

Compliance Footer 

Arden Hill Partners is a DBA of Belpointe Asset Management. Investment advisory services are offered through Belpointe Asset Management, a registered investment adviser. This material is for informational purposes only and should not be construed as legal, tax, or investment advice. Business valuation and succession planning involve multiple disciplines, including legal and tax considerations. Clients should consult with their attorney and tax advisor regarding their specific situation.