Running a business involves being well-equipped with the right tools to ensure success. One such tool is the profit and loss statement (P&L), which is critical for managing your company. This financial statement allows you to properly monitor your profits and losses, or, how much you are making or losing.
The accuracy of the profit and loss statement hinge on proper bookkeeping and accounting practices. Consequently, the profit and loss statement can help business owners and managers make future projections about the business’s growth and development. The data may also be used to guide business decisions, such as determining the price, choosing to expand, or cutting back on some expenses.
If you are just starting your company and are a neophyte in terms of knowing business terminology and understanding how to use such business tools, or, if you are a long-time business person who is just in need of a refresher, this article will help. It covers everything you need to know about the profit and loss statement, and how this can aid you in making your company reach greater heights.
The Profit and Loss Statement
A brief run-down on definitions: The profit and loss statement is a type of financial statement that demonstrates how your business has earned or spent over a given period. This may be a simple document but it has the power to show you the remaining balance once expenses and losses have been subtracted from your total revenue.
Profit and loss statements can either be single-step or multi-step. The former is a straightforward statement that simply adds up total revenues and subtracts total expenses, resulting in your net income.
The latter, on the other hand, requires you to perform a few more calculations to arrive at your net income. Note that the decision to choose which type of P&L statement will depend on the kind of business and the purpose of the P&L. It is also referred to as an income statement when it is intended to be circulated outside of the business as it could be used to encourage investors to infuse funding for a possible expansion.
When is the P&L Prepared?
Often, this is prepared during tax season. However, you can prepare monthly income statements if you wish to regularly monitor and compare your income growth throughout the months. With diligent bookkeeping and accounting, it would be easy to monitor and calculate your company’s P&L statement.
How to Analyze the P&L
Apart from correctly preparing the P&L statement, you must understand what the numbers signify. Find out below:
- Check the bottom line
If you would like to quickly see how good, or bad, your business is doing, check the bottom line. If it is in black, that means you have had more earnings than expenses for that time. If it is in red, you had more expenses than earnings.
While net profits are always a big win, do not feel too bad for having a net loss, especially if you are just starting. Just make sure to use this as an indicator for all the improvements that are left to be done.
- Look at your income streams and expenses
Once you have checked whether your company has made money, you should take a look at all your income streams and expenses. See if your revenues align with your business goals and whether the increases are one-time or continuous. Keep watch over profit surges as a result of gradual growth or events and promotions.
Moreover, check if your expense is reasonable for the time that the P&L examines. Check your fixed and variable costs. If you suffered a net loss, use this time to see areas where you can reduce spending, and areas where you can improve your income generation.
- Make comparisons
They often say comparison is the thief of joy, but in business, it is essential to growth. It is important to compare your current numbers to previous ones to gauge your company’s growth. Compare your P&L to previous statements to see if there are any improvements, and to pinpoint aspects of your business that you still need to work on.
- Always double-check your numbers
Always, always check your math. Numbers never lie! Though excel and other software allow for easier encoding and reviewing of P&L statements, it is also just as easy to make a typo on a calculation or accidentally change a formula. It is; therefore, very important to double-check your calculations, ensuring there are no errors in your sheet.
If you’re not fond of numbers, you can outsource this task to a competent team. Call our reliable CPAs for assistance as we can help you prepare your P&L and more. We’ll take the pressure off of you so you can focus on other aspects of your business.