Your Profit and Loss is a vital business document. There’s no denying that. But there’s also no denying that a P&L is incredibly limited in terms of what it can tell you – and misleading in terms of the story it spins to reassure you that things are running better than they really are.
Profitability Can Be Good When Liquidity is Poor
A lot of things can look good on paper, and profit is one of them. That’s why, from a P&L alone, a business’s position can look pretty rosy, since client payments more than outweigh vendor payments, payroll, and bills.
So, what’s the problem?
Cashflow isn’t profit. You can have a lot of invoices sent out, but if a number of clients are slow to pay or disputing charges, you may still struggle to pay your staff or your rent. Similarly, you could have vendors preparing invoices that you haven’t accounted for, particularly if they’re running late. What’s more, things like loan repayments don’t show on a P&L, while having a direct impact on your cashflow, meaning that the day-to-day reality is very different from what a single document is capable of showing.
How Prepared You are For Disruptions to Business Continuity
Even the most profitable business can be turned upside down by a disruption that wasn’t planned for. At times, this can be a key member of staff suffering a long-term illness that takes them (and their expertise, vision, and client relationships) out of the equation, with no succession plan in place to weather the storm.
Alternatively, disruption can take the form of an injury to a customer while they are on your premises – or, alternatively, damage to the property that forces you to close for even a short amount of time. Both instances, while very different, can happen in an instant and totally rewrite the business’s immediate outlook. A strong business insurance will offer an invaluable cushion, which is why operating without it is such a risk from day one – something that doesn’t appear on your P&L, either.
So, while the P&L shows the approximate health of the business right now, it offers no guarantee that the picture will still look the same (or even remotely similar) tomorrow.
Profit Tells a Very Limited Story
It’s not uncommon for businesses to see a few months of elevated profit as a result of a one-off project or limited client contract that won’t offer the same in billings, say, six months from now. In fact, even for longer-term projects and services, if you don’t have client contracts that offer a guaranteed revenue stream for a certain amount of time, then you are effectively operating under a major risk that cannot be represented in a P&L alone.
With that, all you see is a business that is operating with a strong profit margin.
A P&L Doesn’t Say Anything About Your Assets
All of the assets that you rely on to meet quotas or client orders right now are likely in varying states of repair or disrepair. Age, use, and luck all play a role in how quickly the timer ticks down to ‘downtime’, when a major machine needs to be repaired or, worse still, replaced.
This is a constant risk to any business that relies on more than just clean air and sunshine, even if it’s just the computing suite or a digital asset up in the cloud. Whatever it is, if you’re not properly planning for the day when something goes wrong – production grinds to a halt, or a hack brings all internal systems crashing down for hours – then you’re overlooking one of the biggest threats to continuity.