Why Your Business Needs Profit & Loss Statements
Reaching your revenue goal for the period may feel like an achievement, but is it enough to indicate that your business is doing well? The answer is no. You still need to work out the profit and loss of the business in order to see if there’s anything you should be worried about. Before you take any action, it is important that you truly understand what a profit and loss (P&L) statement is, and how to analyze it.
What Is a Profit and Loss Statement?
In simplest terms, a profit and loss statement is an income statement. More specifically, it is a financial report that summarizes the company’s net income, including gross profit, operating profit, and non-operating profit, and expenses (such as income taxes) during a specified period of time.
Why It Matters
For people in charge of P&L, such as a small business owner or a company’s CFO, these income statements provide crucial information. They allow the company to manage its budget and resources strategically.
What About a Trading Account?
While a profit and loss account documents the company’s annual net profit and loss, a trading account calculates gross earnings prior to any deductions. A trading income generally depicts the outcome of trading activities, including the profit earned and the loss from the selling and purchasing of goods.
How to Read It
If you know all the components in a profit and loss account statement, reading it won’t be difficult for you. Here is a detailed summary of what each segment means.
// Revenue
Revenue is the income that you get from sales. You will want to calculate your break-even point to determine your net profit. For example, if your company has a positive net profit, then it means that your revenue rests higher than this break-even point.
// Direct costs
Direct costs, also known as the cost of goods sold, refers to the money spent on your products or services. Any expense relating to the company’s goods or services would be under this category.
// Gross margin
Gross margin can be computed by subtracting direct costs from revenue. A high gross margin indicates that your company is in a good place financially.
// Operating expenses
Operating expenses refer to any expenses incurred to run your business, including rent, administrative expenses, salaries, utilities, and the like.
// Operating income
Operating income refers to your earnings before interest, taxes, depreciation, and authorization. You can calculate operating income by deducting operating expenses from your gross margin.
// Net profit
Net profit, also called “the bottom line,” refers to the profit after expenses have been subtracted from the revenue.
How to Prepare a Profit and Loss Statement
Not everyone who owns a business knows how to make an income statement. Luckily, there are many financial tools and templates available on most online accounting systems. If you are not comfortable with using these systems, simple profit and loss statement can be done on Microsoft Excel. Regardless, having a professional to handle your statements for you will always be a safer alternative.
Financial Statement Tools: Recommendations
QuickBooks is the best bet when it comes to assisting business owners in generating an accurate and professional profit and loss statement. Your P&L report will include total income, subtotals for income or expense accounts, profit margins, categorization of expenses and losses, detailed transaction lists for any entry, customized percentages, and identifications of overspending or underspending. Not to mention, the price of the software is fairly affordable as well.
Final Thoughts
The ability to manage your profit and loss is crucial to ensuring that your company’s earnings and expenses are on track. Know your business better by creating an income statement for yourself or give QuickBooks a chance!
Totally Booked offers bookkeeping by QuickBooks Certified ProAdvisors based out of NYC. Get in touch today to see how we can help!