What Your Profit and Loss Can Tell You About Business Efficiency

Most business owners look at the bottom line of their profit and loss report first. Did the business make a profit, and was it better or worse than last year?

That matters, but the lines above the profit figure can tell you just as much.

Changes in electricity, fuel, freight, materials, waste and other operating costs can show you where the business is under pressure. They can also point to areas where it may be worth checking how resources are being used.

The report will not give you the full explanation. It helps you decide where to look.

What does a profit and loss report show?

A profit and loss report brings together the income earned and expenses recorded over a particular period. It may cover a month, quarter or full financial year.

It answers an important question: after the expenses shown in the report, did the business make a profit or a loss?

To understand how the business is operating, look beyond the final result. Compare individual expenses over time and consider what was happening in the business during each period.

An expense increasing is not automatically a problem. A growing business will often spend more. The useful question is whether the cost changed in a way that makes sense.

Start with what changed

Choose two comparable periods and look for expenses that have moved noticeably.

Comparing this month with last month can be misleading if the business is seasonal. Comparing the same quarter in two different years may be more useful. The best comparison depends on how your business operates.

For each cost that stands out, ask:

• How much did it change in dollars?

• How much did it change as a percentage?

• Did sales or business activity change at the same time?

• Was there a known price increase?

• Is the expense recorded the same way in both periods?

You are not trying to explain the whole report at once. You are narrowing down the costs that deserve attention.

Compare costs with the work the business did

A dollar increase makes more sense when you compare it with sales or another measure of activity.

Suppose a business had sales of $1 million last year and spent $300,000 on materials. Materials represented 30% of sales.

This year, sales increased to $1.1 million and material costs rose to $374,000. Materials now represent 34% of sales.

Some increase was expected because the business sold more. The larger share of sales going to materials tells you there is something else to understand.

The reason could be supplier price rises, a change in the type of work completed, extra waste, rework or the timing of stock purchases. The profit and loss report cannot tell you which explanation is correct. It tells you that the material cost is worth investigating.

Revenue is not always the best comparison. A manufacturer may look at material used per item produced. A delivery business may compare fuel with kilometres or deliveries. A café may compare food purchases with meals sold.

Use a measure that reflects what creates the cost in your business.

What different expense lines may be telling you

Energy

If electricity or gas costs have risen, check the bills to separate price changes from higher use. Then consider operating hours, production and any changes to equipment.

The report shows the dollar movement. The bills show how much energy was used.

Materials

If materials are taking a larger share of sales, check supplier prices, the mix of work, stock on hand and the amount lost through offcuts, spoilage or rework.

Purchases and materials used are not always the same, particularly when the business holds stock. That needs to be allowed for before drawing a conclusion.

Fuel and freight

A higher fuel or freight cost may reflect price rises, more deliveries or a change in where customers are located. It may also come from urgent shipments, repeat deliveries or inefficient routes.

Compare the cost with deliveries, kilometres, jobs or another measure that suits the business.

Waste

Waste expenses may appear as collection fees, but the larger cost can be hidden in materials that were bought and then discarded.

If waste collection costs rise, look at what is being thrown away and whether the business is also buying more material to replace it.

Five questions to ask before reaching a conclusion

1. Are the periods genuinely comparable?

Check whether the business operated for the same amount of time and whether seasonal demand, shutdowns or one-off projects affected the result.

2. Is the increase caused by price, use or both?

An expense total alone cannot separate them. Go back to invoices or usage records.

3. Did the business do more work?

Higher costs may be reasonable if production, customer numbers or deliveries also increased. Compare the expense with a measure of activity.

4. Has the type of work changed?

A different mix of products, services or customers can change the resources the business needs, even when total sales are similar.

5. Is the bookkeeping consistent?

A changed account code, missing invoice or unusual timing can make a cost appear to jump. Confirm that you are comparing like with like before investigating the business operation.

What the profit and loss cannot tell you

The report records dollars. It does not usually show kilowatt-hours, litres, kilometres, kilograms of material or the amount of waste produced.

It also may not show which job, product, location or process created the cost unless the business records that extra detail.

This means the profit and loss is a starting point. Once you identify a cost worth reviewing, bring in the records that can explain it. These may include bills, supplier invoices, stock information, job records or delivery data.

You may also need to speak with the people doing the work. They often know about a changed supplier, repeated fault or awkward process before it becomes obvious in a report.

Not sure which costs deserve a closer look?

Our wider guide, How Your Business Numbers Can Help You Find Sustainability Savings, explains how to move from a change in your accounts to a practical review of energy, fuel, materials, waste, freight and water.

Make the report more useful over time

A profit and loss report is easier to use when similar expenses are recorded consistently and important costs are not hidden inside a broad category such as “other expenses”.

If energy, freight, materials or waste are significant to the business, consider whether they are easy to identify in the accounts. For a larger business, it may also be useful to separate costs by location, part of the business or type of work.

Only add detail that someone will review and use. More accounts do not automatically create better information.

Review the report regularly enough to notice a change while you can still investigate it. For many businesses, that means looking at it monthly and stepping back each quarter to consider the bigger pattern.

Use the report to ask better questions

Your profit and loss report cannot tell you whether a machine is inefficient or why more material is being wasted. It can show you which cost changed and how large that change was.

That gives you a practical place to begin.

The wider guide, How Your Business Numbers Can Help You Find Sustainability Savings, explains how to move from a financial clue to a closer review of resource use and possible savings.

If your business has costs that keep rising and you are unsure what is driving them, the Sustainability Savings Review starts with the information you already have and identifies areas worth investigating.

Frequently asked questions

Can a profit and loss report show that my business is wasting resources?

Not by itself. It may show that a relevant cost has increased, but you will need bills, usage information and knowledge of what happened in the business to understand why.

Is every increase in expenses a sign of inefficiency?

No. Costs may rise because the business grew, suppliers increased their prices or the work changed. The aim is to check whether the increase makes sense.

How often should I review my profit and loss?

Monthly review is useful for many businesses, with a broader comparison each quarter. A highly seasonal or fast-moving business may need a different rhythm.

Are some of your business costs rising without a clear explanation?

A Sustainability Savings Review starts with the financial information you already have and identifies the areas worth investigating further.

Find out about the Sustainability Savings Review