What exactly does your p&l account tell you?

In the last week, I've done a number of presentations to business owners around the Wellington region. And thinking through the sessions afterwards, I realised just how limiting the focus on a business's profit and loss account really is.

When it comes to managing small business finance, most people focus on their P&L account. That makes sense, it tells them how their income and expenditure is building up, their current profit (or loss) balance to date and they can allow for the income tax liability on the profit. And, if they've created a budget, it will show how things are tracking against that budget.

But that's about it.
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​Financial accounting focuses on the past. It is a record of what happened. Whilst it might give some clues to the future, it is likened to driving a car by looking in the rear view mirror.

The P&L account does exactly that: ​

• It records the past.
• It is the accumulation of transactions related to activities that have happened.
• It reflects the outcome of decisions made by the business.

• It doesn't show the history of the business's activity beyond the last financial year. 
• It doesn't show where the cash has been spent.
• It doesn't show how the future might look.
• It doesn't show the health of the business.
• It doesn't highlight areas where changes or improvements need to be made RIGHT NOW.

Other financial statements, like the Balance Sheet and the Cash Flow statement, have the capacity to provide more information, but it is the analysis and review - the management accounting - that will provide the answers to the questions that business owners actually most need.
The most used financial report - the P&L - just isn't enough.