A profit and loss statement, as the name indicates, is used to examine the flow of your money, which means you will come to know how money is moved through a company over a specific time period. It will help you understand what remains as profit and what went out as loss. You can seek help from a professional bookkeeper for small business to prepare profit and loss statements for you to make informed business decisions. Potential investors of the company also use this statement to determine whether your business is worth backing. In this guide, we’ll shed light on the significance of a profit and loss statement, how it works, and how you can make informed business decisions.
Table of content
- What is a profit and loss statement?
- How does a profit and loss statement work?
- What is included in a P&L statement?
- How do businesses use a P&L statement to make informed business decisions?
- Conclusion
What is a profit and loss statement?
A profit and loss statement is a financial report used to examine what your business made or lost in terms of profit and loss during a specific time period. It includes what went out (expenses) and what came in (income). With the help of a P&L statement, you will understand whether you made more profit than you spent. Companies usually prepare a P&L statement monthly, quarterly, or annually. Lenders and investors consider this statement to check whether the company is profitable. On the other hand, cash flow statements and balance sheets are used for different purposes, but the P&L statement reveals whether your business model is working properly. With the help of the P&L statement, you will come to know how costs, sales, and profits change over time.
How does a profit and loss statement work?
A profit and loss statement is based on just one equation: revenues minus expenses. The last number, whether it’s negative or positive, shows whether a business made a profit or took a loss.
Revenue: The total income earned in the period covered by the report.
Expenses: The direct costs of producing a product or a service (also called cost of goods sold, or COGS), plus overheads like salaries, office rent, marketing, software and utilities.
The Bottom Line: The difference between the expenses and revenues is the profit or loss for the business.
What is included in a P&L statement?
- Revenue: This is the business income from the sale of goods or services.
- COGS: This is the sum of all of the direct costs that went into producing what you sold. Such as direct service delivery costs, raw materials, contractor fees or production labor.
- Gross profit: Revenue – COGS. This is what will remain after the direct costs of production, but before overhead.
- Operating expenses: These are the regular costs of running the business.
- Operating profit: Gross profit minus operating expenses. This shows the profitability of the company’s primary operations.
- Other income and expenses: Loan interest, interest income, one-off gains or losses all come here. These adjust the business’s finances beyond its core activities.
- Net profit: After accounting for everything, this is the profit left over. If it returns a positive number, it means the business earned more than it spent; on the other hand, a negative number means that the business spent more than it earned.
Get bookkeeper services in Melbourne to get a P&L statement of your business, so you can make appropriate decisions for your company.
How do businesses use a P&L statement to make informed business decisions?
- Identifying performance trends
If revenue is increasing but profits are decreasing, it’s a sign that expenses are more than your revenue. This could mean that payroll has increased too quickly, overhead expenses have increased, or suppliers have increased prices. With the help of a P&L statement, you will come to know about hidden winners that you can pay close attention to.
- Forecasting and budgeting
Budgeting and forecasting can help if marketing expenses have been increasing day by day, but you don’t see a spike in sales. With a P&L statement, you will know what the company is able to afford to spend in the future.
- Communicating with investors and lenders
Partners, lenders, and investors usually consider P&L statements because, with this statement, they will clearly see the company’s financial status.
Once you have every record of your revenue, expenses, and other matters, a tax accountant Melbourne can use this data at the time of tax return lodgment to help you save money on returns where possible.
Conclusion
The blog shares information on understanding a P&L statement, what’s included in this statement, and how you can use it to make business decisions. To help you prepare financial statements, you can opt for reliable bookkeeping services.