Six Things You Should Know About Your Profit & Loss Statement (aka Income Statement)
Most entrepreneurs have heard of a Profit and Loss Statement which is also known as an Income Statement. In this short post, I am going to share 6 things you should know about this financial statement and how it can help you as a business owner.
The Profit and Loss (or Income) Statement is a snapshot of the financial health of your business at a given time period. This statement includes your revenue (income) and your expenses. This statement takes the income you made in the given time period and subtracts all the expenses within the same time period. What you have left is your profit (or if you had more expenses than income, you have a loss...insert sad face here)
Be consistent on how your run your Profit and Loss (P&L) Statement in your accounting software. Most accounting software programs allow the user to run the reports using the Cash or the Accrual basis. This matters as your numbers can very depending on which basis you use. Pick Cash or Accrual when running your reports and stick with it. You may have to change it later, but don't flip flop back and forth on a regular bases. You won't get a clear picture of your business this way. (Tip: ask your accounting professional if they run your reports on Cash or Accrual. If you run your own reports, use the same method your accounting professional does.)
When you look at your P&L, don't just look at the "bottom" line which is the Profit (or Loss) line. Sure that matters, and everyone wants to know if they made a profit or took a loss, but there is more to this statement then that. For example, if you have more than one stream of income in your business, you can have your bookkeeper divide those income streams. Do the same for the expenses that match those income streams. When your bookkeeper (or other accounting professional) shows you the P&L, you are able to look at the individual income streams and attached expenses, then decide which income stream is more profitable. Comparing over time, you can build a great picture of what direction you want to take your business in for more profitability and growth.
Compare P&L Statements. A great way to see a trend in your business or profitability is to either run a Comparative P&L or keep a file of the P&L Statements that you have. This will give you a wonderful history of trends in your business. I like to look at my P&L (yes, I actually do practice what I preach) and make notes on my comparative of what was going on during an up or down trend. Example: I have 3 good months of more income or a gained a new client. How did I do that? Was I networking? Was I running social media ads? Did I have extra costs to this upward trend like paying for those social media adds or paying for the networking? Was this increase actually profitable for my business? (I get goosebumps just thinking of this stuff! Insert happy face here!!!!)
Use the information to make good and sound business decisions. The P&L can help you make decisions that can help your business grow. The truth is that many business fail because they don't have enough capital to start or run a small business in the early stages. You can avoid this by looking at your financial statements and using the information in them to make important business decisions.
The Profit and Loss Statement is a powerful tool, USE IT! Talk to your bookkeeper or accounting professional and see how this detailed information can help you. Watch your business trends and use it to your advantage. You will be glad you did!
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
RH Business Solutions
Any accounting, business or tax advice contained in these articles, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please seek consultation from the appropriate accounting/tax professional.