Get in control of your business with a profit and loss statement
A profit and loss statement may also be referred to as a P&L or income statement. Additionally, it can also be called a statement of revenue. It is one of the three important financial statements that companies often generate.
This statement measures the revenues and expenses that a company incurs over a specific period. Therefore its focus is on historical data. It is primarily used to show the financial strength of a company over a given time, but it can also be used to predict how a company will continue to perform at the same revenue and cost levels financially. Information presented in the income statement can show a company’s future ability to generate profit by either increasing revenue, decreasing costs, or both.
The profit and loss statement includes information related to Revenues, such as net sales, Expenses, such as Cost of Goods Sold and finally presents a Net Profit or Net Loss during the time based on the calculations. Here is a look at a simple P&L statement:
Sales revenue will be the first thing to include in your income statement. This will be gross sales revenue, which includes all the costs associated with the sales or services offered. There can also be multiple revenue streams, all of which should be included. An example of a secondary source of revenue is the sale of a long term asset.
This includes the Cost of Goods Sold (COGS), the costs related to generating the primary sales revenue, which includes costs like wages, commissions, utilities, transportation, and materials. Expenses can also include amortization and depreciation, where relevant. In addition, Losses, can be added to this category and encompass costs such as a lawyer’s fee or a loss on the sale of a long term asset. Be vigilant of “Other Expenses,” as if these are growing or recurring often this could be due to unnecessary spending habits. Therefore, it is wise to evaluate them regularly.
Finally, you can deduct the expenses from the revenues to calculate your Net Income or Net Loss. If you are generating a Balance Sheet , this will be the figure that is transferred to the Retained Earnings sections on that report.
The Importance of Generating a P&L Statement
Creating a P&L statement can be very helpful, and there are numerous reasons why including it in your financial reports is important.
Better Decision Making
Businesses fair better if there is less guesswork involved in the decision-making process. You can use the P&L statement to review how well your business has performed over the given period. This, in turn, will help you make key decisions about cost-cutting measures or increased sales generation opportunities where warranted. Using this statement for planning and forecasting will result in lower amounts of avoidable business surprises that can hurt your profit margin. Overall, making these decisions without clear knowledge about your business’ position can lead you into dangerous waters.
Proof of Business Success
Besides the fact that you want your business to be successful for your benefit, it needs to be successful for a number of other stakeholders. New clients are extremely important to a company’s growth, and therefore have a successful track record can be used as a key piece of information to draw in new clients. Having consistent financial stability forms a foundation of trust, and this is beneficial not only to persuade new clients to choose your goods or services but also for banks and investors.
Banks look at income statements to get an overview of how a company has been performing to make decisions like whether or not to grant lines of credit or loans to the company. Whereas investors are interested in the current and future profitability of the company to ensure that their investment is sound or as part of a decision to reinvest. Having consistent positive financial stability presented over income statements will provide higher confidence in those who could potentially offer financial assistance to a business.
Any action related to taxes, whether it by preparing or filing them can be stressful, long, and arduous. If consistent income statements are prepared, along with other financial statements, this process becomes more streamlined as all required information will be easy to find and understand. You can transform your process from sorting through loose paperwork and receipts, trying to make sense of it all to gathering your statements and quickly locating relevant information with the addition of reports like the P&L statement.
A profit and loss statement will quickly inform you about any mistakes that could have been made such as over-ordering, or untoward behavior that has taken place, as this will be reflected in a discrepancy in expected numbers for the sections of the statement. Consistently and accurately using the statement will give you the ability to catch these types of errors quickly and early on, mitigating costly financial losses.
In conclusion, the P&L statement, when prepared and used consistently and accurately will become an integral part of ensuring that you have a better hold on the financial information regarding your business. It provides valuable insights to your business, including operating information, management efficiency insights, and cost reduction opportunities, all leading to a healthy and growing business.