Understanding P&L Statements in Your Aesthetic Practice

As a practice administrator, manager, or owner, understanding and effectively analyzing your profit and loss (P&L) statements in your aesthetic practice is crucial for making informed business decisions. In this blog post, we will explore the fundamental aspects of a P&L statement, discuss the importance of regularly reviewing it and provide valuable insights on optimizing revenue and reducing expenses to enhance your practice’s profitability.

Defining the P&L Statement:

Before diving into the details, let’s clarify what a P&L statement entails. Often referred to as an income statement, a P&L statement provides a snapshot of your practice’s financial performance over a specific period. It showcases the revenue generated, expenses incurred and ultimately determines the net profit or loss.

To see some examples of what P&L statements should be structured like and acquire a template, be sure to read this article from the Corporate Finance Institute.

How Often Should You Review Your P&L Statement?

By regularly monitoring your P&L statement, you gain valuable insights into your financial health and can identify trends and potential issues early on. Monthly reviews are ideal, but at the very least, you should be conducting your evaluations every quarter.

Why is frequent review essential? By identifying patterns and changes in revenue and expenses, you can proactively address any disparities and take corrective actions promptly, especially with your marketing efforts and strategies. Understanding the percentage of expenses to total revenues helps uncover potential discrepancies in specific chart of accounts line items.

Who Should Create & Review P&L Statements?

Determining who should create and review the P&L statement in your aesthetic practice is an important consideration. If you, as a business owner, find yourself too busy to handle this task, you can rely on accountants, bookkeepers, or consulting firms (like your favorite company, Shorr Solutions!) to create the statement on your behalf. However, it is crucial that you actively participate in the review process.

By examining the P&L statement yourself or alongside your financial expert, you can gain a confident understanding of your business’s financial performance, identify potential issues and make informed decisions so that your practice succeeds and is profitable.

Understanding Profit and Loss Statements in Your Practice: What Are the Components?

Your P&L statement is comprised of two primary components: revenue items and expense items. Revenue items include all the sales and income generated by your practice, while expense items encompass the costs and expenditures associated with running your business.

Understanding Revenue: Every source of revenue your practice generates, such as sales of treatments. procedures, products gift cards and memberships, contributes to the revenue side of your P&L statement. Additionally, you may receive money or an honorarium from speaking engagements. It is beneficial to categorize your revenue sources, as it allows you to analyze trends and identify areas that are performing well or underperforming.

Analyzing Expenses: Expenses are all the costs and expenditures your practice incurs. Fixed expenses, like rent and insurance premiums, remain constant month-to-month, while variable expenses, such as supplies and equipment, employee salaries/wages, marketing and advertising and repairs/maintenance costs may vary. By examining these expense categories, you can identify potential areas for cost reduction and increased profitability. Always remember, your employee compensation is more of an investment than a cost, because valuing your team and paying them well, increases employee retention and the long-term success of your practice!

Lastly, it’s important to note that these revenue and expense categories are not exhaustive. The specific revenue and expense items listed on a profit and loss statement vary depending on items specific to the operations of your aesthetic practice. A financial professional can help you identify every item in each category for the most precise and accurate financial report of your practice, so never hesitate to reach out!

Choosing Between Cash and Accrual Methods

One decision to make when setting up your P&L statement is whether to adopt a cash or accrual method. The choice typically rests with your financial expert, but it is essential to understand the difference between the two. The cash method records income and expenses at the time they are paid or received. In contrast, the accrual method recognizes income and expenses as they are incurred, irrespective of payment. Depending on your business’s needs and objectives, your financial professional will guide you toward the most suitable method.

Maximizing Profitability: Insights for Optimizing Revenue and Decreasing Expenses

Determining gross profit: Gross profit derived by subtracting the cost of goods sold from gross revenue, represents the initial measure of your profitability. Cost of good solds includes the direct costs associated with producing or purchasing the goods or services that your practice sells such direct labor costs, manufacturing overhead or wholesale purchase costs. Gross revenue is sum of all of your practice’s earnings and sales before making any deductions.

It is very important to note that gross profit alone does not reflect the actual profit that your practice takes to the bank.

Understanding Fixed and variable expenses:
Every dollar of expense you reduce, represents a 100% profit margin or full profit dollar. On the other hand, every revenue dollar you earn, may only represent a 33% profit margin or $0.33 of profit for every dollar. While fixed expenses might not be easy to reduce, variable expenses can be reduced. Thus, identifying areas where you can lower your variable costs substantially affects your profit margin and is worth working on.

Balancing revenue and expenses: While revenue growth is highly desirable, it is equally important to control expenses. Analyzing your P&L statement allows you to determine if increased revenue is offset by rising expenses. Remember, reducing expenses directly impacts your profit margin, as each dollar saved contributes to 100% profit.

Conclusion

In conclusion, understanding your profit and loss (P&L) statements is an essential skill for practice administrators, managers and owners. By knowing the basics, regularly reviewing/analyzing it and optimizing your revenue/decreasing expenses, you can make informed decisions for your practice’s financial growth. Remember, controlling expenses and finding the right balance between revenue growth and cost management are key to maximizing profitability.

Schedule Free Consult & Learn More

If you want assistance and one-on-one coaching on how to review your P&L statement or would like for us to review it FOR YOU, don’t hesitate to reach out to our team of experts! Schedule a free consult with our award-winning expert, Jay Shorr, to start today!

To learn MORE about how to master your P&L statements in your aesthetic practice to ensure you are making every dollar count, tune in to episode 86 of Shorr Solutions: The Podcast “How and When to Properly Review Your P&L Statement”!