Wednesday, October 12, 2011

What's Profit and Loss?

Years ago, I interviewed for a job and the interviewer asked me what I knew about P&L. The question blew my mind. Immediately, I feared that I was not qualified for the job. My confidence vanished with two letters P & L. I answered that the accountant was the one who maintained the P&L report using an accounting software (here is where you can laugh till your sides split – I know I laugh at this reply now). The interviewer just looked at me and said –“ahhh… guess that’s ok… I suppose it is something you can learn”. Funny enough, I still got a job offer.

Of course, I was mortified and had to go learn about P&L. I already knew it referred to profit and loss, but how that applied outside of accounting – why would I know it without a CPA, I could not imagine. So, I researched it and not only could I learn about profit and loss, I already knew it very well. We all know it well. It is basic survival!

Profit is how much money you make and loss is how much goes back out. Still, there is a bit more to it. But still it is easy and common sense. It relates to keeping within a budget and working smarter not harder. Further, it refers to opportunities taken and lost. While we all touched on this stuff in finance classes, econ class that wasn’t real - yet we do it really every day.

When you choose to drop the kids off at the field on the way to the supermarket – since it is ‘on the way’ – you just maximized profit and minimized loss. You saved on the gas required to two trips. You made the most of your time (assuming you only slow down to 60 mph and push the kids out the window as you pass the field). But seriously, you just mastered profit and loss in the form of efficiency resulting in savings.

When you have to choose whether to take a new job or remain with the same company, you are deciding on how to maximize profit and loss. Which option will give the best profit which will result in the least loss. Assuming that your current job isn’t terrible - a job change would result in leaving any seniority you may have, you’d leave stability, and change your routine. You may miss an opportunity for advancement with your current company. For what, the new job is paying $1.50 more per hour? But perhaps, the new job also has superior benefits. That choice, is profit and loss. You know there is always a trade off. You cannot pursue two opportunities at the same time. So you choose the option that is likely to bring the most profit and the least loss. With this, you are a master in understanding opportunity cost.

Above, I referred to budget as well. Who doesn’t have a budget? You know what you earn. You know what you need to survive. You know what you can and cannot afford. Smartly, you buy within your means. TA DA budgeting. You budget so that you don’t spend more than you have. You budget so you can keep the maximum amount of money in the bank for other things. You want as much purchasing power as possible so you shop at discount stores where you can buy more things for less money. This too is profit and loss in the form of budgeting and resource maximization.

The basic idea – make the most with what you have, try to get more for less, live within your means. The same applies in business. The difference between business and personal profit and loss – not much except the number of accounts. Business related profit and loss can teach a person a lot about how to handle their personal life and vice versa. You can see that in this basic interpretation of profit and loss: always stay within budget, plan wisely for the future, maximize efficiency, think about getting the most out of your selection between conflicting opportunities, maximize your use of resources, eliminate redundancy, buy supplies that offer the most value toward your ultimate goal – whatever that goal may be.

Now, all this time later I can honestly answer: Yes, Mr. Interviewer, I know all about P&L


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