The question, “What is a profit and loss statement and why do I need to look at it?” comes up often enough that a brief explanation is in order. One thing that I’m always amazed by is the willingness of hearing healthcare professionals to open a practice with very little formal business training. Your passion for helping others probably got you into this business, but your ability to run your businesses successfully is what keeps you in business.
Many owners may be in business for years before they see a profit-and-loss statement. Even if someone else is taking care of your bookkeeping or accounting, it is vital to understand this tool. It’s your gauge for knowing how successful the business is, and it provides great information for setting goals. It can show trends that warn when the business is failing. It can also give you clues about how your business can grow.
The most basic function of a profit-loss statement is to determine your gross profit and net profit. Gross profit is the difference between cost of goods sold and total sales. Net profit is the difference between your gross profit and total expenses. Net profit is the bottom-line dollar amount that the business earns at the end of the day.
A profit-and-loss statement can usually be generated electronically through accounting systems such as QuickBooks or Peachtree. Your accountant can also generate one based on the information you provide. Usually a profit-and-loss statement begins with your income. Details are helpful here. For example, you can break down each sales category separately to serve your needs. I suggest creating categories for hearing aids, hearing tests (sub categorized if your office provides specialty testing), ALDs, Ancillary Care Products, Repairs.
The next category is the cost of goods sold. This is how much you pay for your products for resale. The breakdown of your cost-of-goods-sold categories should mirror your sales categories. That way you can calculate individual gross margins for each category.
Again, subtracting the cost of goods sold from your total income will leave you with your gross profit. This is how much money you have made before expenses.
It is extremely important to list all of your expenses. Some of your basic fixed expenses will be utilities, rent and insurance. These are expenses that should remain consistent and that you have limited control over. It is also important to have your variable expenses listed. These are expenses that in many cases you can control. Some of these would be advertising costs, travel and entertainment, and charitable contributions. By tracking your variable expenses, you have the ability to help your company be more profitable. If the practice’s gross margin declines for some reason, these expenses can be reduced.
Some of the other standard expenses that will show up on a profit-and-loss statement are labor costs, professional fees and office supplies. These again are expenses that can be reduced when the practice’s profits are not in line with the owner’s goals.
Last but not least, don’t forget to create categories for any additional expenses that come through the business such as licenses, dues and subscriptions, and postage and shipping. Interest on loans that you pay, or bad debts you can’t collect, should also be added to your profit and loss statement.
Finally, get into the habit of viewing your P&L at the beginning of the month, mid-month and at the end of the month. Doing so will help you to use your P&L to accomplish three very important things.
- Problem Solve
Reading this was probably a painful process. There’s only so much humor you can inject into any article related to Accounting. I hope you made it all the way to the end and I hope when you’re done reading the article, the very next thing you do is go look at your P&L.