What is a profit and loss statement?Often referred to as the income statement, the profit and loss statement is one of the cornerstones of business financial analysis and reporting. Its role is to summarise the revenue, costs and expenses of the business over a period, giving an insight into the business? ability to generate a profit. All over the world, profit and loss statements tend to follow the same structure of revenues, cost of sales, and operating expenses, with the statement calculating gross and net profits from these numbers. Here?s an example:
|Cost of Sales (b)||?40,000|
|Gross Profit (c) = a-b||?60,000|
|Operating Expenses (d)||?20,000|
|Net Profit (e) = c-d||?40,000|
Why is a profit and loss statement important?By structuring the finances of the business in this way, it?s straightforward to see what?s going on and to ask some key questions that can impact how the business is run, such as:
- Is the cost of sales too high, and do we need to become more efficient at making the item or source a cheaper supplier?
- Are revenues too low and not generating enough money to cover the operating costs? Do we need to get more customers or look at charging more for what we sell?
- Are the operating expenses too large, and do we need to start making some cost savings?
What else should I?consider?As useful as the profit and loss statement is, it isn?t the only document that a business needs to review regularly. Balance sheets will show a snapshot of where you owe money and where it is owed to you, as well as where your funds are tied up, and cash flow statements, as the name suggests, shows you the inflow and outflow of money in the business. Make sure you look at all the financial statements at your disposal. Warning of focusing too much on the profit and loss statement, founder of Dell Technologies, Michael Dell, said: ?We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. ?It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.? Robert Drury is head of product at small business cash flow platform Ormsby Street.? The difference between a sole trader and a limited company
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