A profit and loss statement, also known as an income statement, is essential to every business in every industry. It provides a detailed view of a company’s financial performance during a particular period, such as a month, quarter, or a year. A profit and loss (P&L) statement demonstrates a company’s ability to make profits, and helps business owners and decision makers identify areas that need improvement.
If you want to learn more about P&L statements, this Balboa Capital blog article can help. It will help you better understand P&L statements, including their structure, how to read them effectively, and how they are used to track profits and manage revenues. We think you will find this information to be very helpful and informative.
An important part of your business plan.
Your P&L statement is perhaps the most important part of your business plan. It is the best way to examine your revenues, costs, and expenses over a given period so you can see your company’s financial progress. Your P&L statement provides you with a snapshot of how cash is flowing into to (and out of) your business. You can use your P&L statement to help predict future income, and identify expenses that can be reduced and/or eliminated.
Preparing your P&L statement.
Getting your P&L statement started is relatively simple, so long as you have all of the necessary financial information readily available. First, it is important that you understand the basic formula for calculating your company’s profit:
Profit = Revenues – Expenses
Your total revenue, which should be placed on the top line of your P&L statement, represents the total amount of money you are generating from sales. It is important to keep your sales high, as that is the number that covers your expenses and keeps your business profitable. Your total revenue subtracts the costs of running your business to show your gross profit, and your gross profit margin.
Next, add your business expenses below your gross profit margin. These can be entered as separate line items, such as accounting fees, marketing fees, insurance, employee payroll, etc. Finally, subtract your total expenses from your gross profit to get your net profit, and your net profit margin. That’s it – your P&L statement is complete! Here is an example of a typical P&L statement:
|(Less) Cost of Goods Sold||$195,000|
|(Less) Business Expenses|
|Total Business Expenses||$173,500|
|Net Business Profit||$331,500|
How to use your P&L statement.
When reviewing your P&L statement, you might decide to reduce some costs to maintain higher profits for your business. Your P&L statement helps answer questions such as “how can I cut down on expenses?” or “how can I increase our net profit?”
Additionally, you might want to use your profits to increase certain expenses. For example, if your marketing campaign is helping your business generate revenue, you might increase your budget or look at new or complementary marketing strategies. Moving more dollars into a proven marketing campaign can lead to even more sales, as more potential customers will see your products and/or services.
Maintain accurate books.
Keeping your accounting books updated on a weekly, monthly and quarterly basis will keep your business organized, and your financials up to date. Three common accounting reports include balance sheets, P&L statements, and retained earnings statements.
These are essential to keeping the finances of your business in order, which enables you to make sound business decisions that can improve your company and maximize your profits. Bookkeeping can be managed by an on-staff accountant or be allocated to an external accounting professional.
A P&L statement shows how well your business performed during a specific time frame, and they are a great determinant of success. Make sure you maintain an accurate P&L statement so you can calculate profit and make the best decisions as they relate to your company’s financial situation and growth.