Archive for the ‘Income Statement’ category

Business Profit & Loss

June 26th, 2015

Profit & Loss Dice

As a business owner you must continually focus on managing profit and loss to not only stay in business, but to grow and thrive. Profit is the money left over after paying all the expenses. A loss results from expenses exceeding the amount of sales a company makes in a specific period. Companies must manage their profit and loss statements, also known as income statements, to keep earnings positive, and expenses under control and in line with revenue.

Financial Assessment

Managing profit and loss begins with an assessment of your company’s current financial situation. Review the current profit and loss statement and compare it to the company’s last two or three years of historical data. An accountant can use this information to establish a set of performance benchmarks for the company’s average revenue and expense levels.

Analytical Tools

Have an accountant prepare analytical tools such as an income statement spreadsheet that shows every expense as a percentage of sales. This will allowing you to isolate costs that could contribute to decreasing profits. Perform this analysis for, ideally, three years of historical data. Expenses as a percent of revenue are compared for each year to reveal trends that show expenses raising or falling as a percent of sales over time. Some costs, such as the cost of goods sold, will rise with sales increases because they represent the raw materials and labor used to make the products you sell. Rent, administrative costs and some utility bills should remain the constant, regardless of increases in sales.

Explaining Expense Growth

Your accountant should perform additional analysis to investigate and explain the growth of expenses over time. This can reveal valuable information about the use of resources and their cost oversight. External factors such as the economy and rising prices also can contribute to cost increases. You need to find out which of these factors is involved in order to determine which might be controllable.

Sales Review

Next the accountant should review the company’s sales. Depending on various events and conditions, even when internal expenses have been well-managed and cut as low as possible, the company will still suffer a loss if its sales drop below its expenses in any given period. In this case, the company must make important decisions about how and why sales are generated, but may also need to consider discontinuing certain unprofitable product or service lines, selling off assets to free up capital and discontinuing investments in any projects that do not generate revenue.


Simplifying the Profit & Loss Statement

March 29th, 2012

You might not need to be an accountant to be successful in business, but understanding financial reports will help you understand the basics of financial management and feel comfortable using standard financial tools and metrics to monitor and appraise the performance of your business.

How a Profit & Loss Statement helps you manage your business

Financial reports distill the vast amount of daily business data your company produces and arranges it into a usable format, useful in making the best possible business decisions.

Producing regular profit and loss statements, at least quarterly or monthly, will enable you to:

1. Answer the question, “How much money am I making, if any?”

2. Compare your projected performance with actual performance

3. Compare your performance against industry benchmarks

4. Use past performance trends to form reasonable forecasts for the future

5. Show your business growth and financial health over time

6. Detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses

7. Provide proof of income if you need a loan or mortgage

8. Calculate your income and expenses when completing and submitting your tax return.

What is a Profit & Loss Statement?

A profit and loss statement, also know as a P&L or an Income Statement, records sales income, costs and expenses and shows business performance over a specific period of time.  Profit and loss statements:

1. Show business performance over a specific period of time

2. Show income (revenue from sales)

3. Show the costs of the goods you sell (Cost of Goods Sold) such as purchases made from suppliers for goods or raw materials

4. Shows your gross profit (income minus cost of goods sold)

5. Show operational expenses (overhead and other expenses of running your company)

6. Show net income or loss (whether a profit or loss has been made )

Creating a Profit & Loss Statement

The figures in a profit and loss account will come from a number of different sources in your business, so it’s best to organizes and categorize your day to day receipts and expenses into a Chart of Accounts which represents the income and expense categories you want to track and evaluate. This Chart of Accounts forms the core structure of your bookkeeping system, and will be the basis for your Profit and Loss Statement.

A Profit and Loss Statement will usually look something like this:

$250,000       Income
  $10,000        Less Discounts
$240,000        Equals Net Income

   $50,000       Less Cost of Sales/Cost of Goods Sold
 $190,000       Equals Gross Profit

$100,000       Less Operating Expenses
  $90,000       Equals Operating Profit

$5,000        Plus Other Income
    $3,000        Less Other Expenses
  $92,000        Equals Net Ordinary Income (Profit Before Taxes)

  $33,000        Taxes
  $59,000        Net Profit (or Net Loss)

 Accounting Software and Financial Reporting

Accounting software makes it easy for you to create different views of your data. For example, you can compare this month with last month, this year-to-date with last-year-to-date, several months in sequence, or you can convert the figures into percentages and compare them that way. All this makes it easier for you to identify trends over time.

Your goal in business is for your sales and profits to increase, and your expenses, as a percent of sales, to decrease. Look at your profit and loss statements and compare them from one period to another. Are there any sudden changes or anomalies that raise a red flag? For example, if your office expense spending suddenly rose from $100 a month to $500 for one month, you would want to look into this. Or if your staff costs on average 30% of your income and this figure suddenly goes up to 40%, again you would want to investigate.

You can also draw some deeper conclusions than just seeing that more money is coming in than before. Is the increase equivalent to, or better than, the rate of inflation? Is it the result of more sales, or is it hiding the fact that although you have charged more per sale, you actually made fewer sales? And looking ahead, is the rate of increase in line with your goals, or do you need to set a new target? These are just some of the many questions accurate reports can help you address.