As we progress in business as new owners, we have to monitor our business profit margins as well as loss margins. These values depict whether a business can stay running for another 6 months to a year or more. Most businesses consume margin losses due to increases in employees and added fees associated with getting employees comfortable; other losses can be associated with business structure. Most businesses aren’t structured in the method of monitoring their P&L statements weekly or even biweekly, which affects the well-being of the business, financially. The profit and loss statement is a past assessment of how well your business did and presently how well your business is profiting. The 5 main areas of the P&L that we need to be concerned about is total revenue, cost of your products sold, gross profit, any fixed expenses, overhead costs you’ve incurred, and your net profit.
The importance of ongoing evaluation
For example, say I purchased a business for $500,000. This would be considered part of my revenue line. Let’s say the cost of my products sold was $200,000, this means that my gross profit for what we have right now is $200,000 (what we sold). As I add in my fixed expenses like gas, electricity, water, etc., at $100,000, subtracting your gross profit and your fixed expenses your total net profit will be only $100,000.
This example best describes how you can evaluate a profit and loss statement to better your search for a lucrative business purchase of a business that is still in the green and making a profit. Many people don’t have the desire to look at a business’s profit and loss statement before purchasing their dream business, but this would be a big mistake. Profit and loss statements can deliver accurate numbers related to your next purchase.
The trappings of a good buyer’s market
Most people were getting excited about buying businesses during the recent recession due to the increasingly low costs that business owners were selling their business for. Many of these people have bought a business and lost that same business during the recession. This was the case of the business buyer, not getting involved in reading the current P&L of the business they wanted to purchase. Most of those businesses were probably drowning in a negative profit loss for more than 6 months to a year prior to the recession. In your next search for the purchase of your new business, you should read the P&L statement and get used to reading them; they are the future or your business staying open.
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