Your profit and loss statement is a key financial report for any aspirational business owner to get their head around – but what exactly is a profit and loss statement? And why is it important?
In the most basic terms, your profit and loss report provides you with a snapshot of what you’re earning and what you’re spending, over a given time period. That’s important for good financial management, so you have the best possible overview of what income you’re generating, what costs you’re incurring and how you’re performing as a business.
Here’s our short guide to getting the most from the profit and loss (P&L) statement.
The advantages of a profit and loss statement
Making a profit is one of the central aims of any business. If you don’t produce a surplus of profit (your profit) at the end of the period then you don’t get a return on your initial investment, you don’t have the funds to grow and your business will eventually stagnate and fail.
The P&L statement – sometimes also referred to as your ‘income statement’ or ‘statement of earnings’ – helps you stay fully in control of this profitability.
Your P&L statement will:
- Give you a breakdown of all revenues and relevant costs and expenses over a given historic period of time – so you know what you’ve earned and what you’ve spent.
- Show the profit and loss figures over a set period, allowing you to quickly see financial performance – an ability that’s incredibly valuable.
- Sum up your profit and loss for the period, so you can see if you’ve earned more than you spent (a net profit) or have spent more than you earned (a net loss).
- The P&L shows you a historic view of income and costs within the company.
As such, by comparing your P&L across time periods, you can quickly see if your performance is improving or declining, make informed decisions about budgeting and be confident around whether the business is going to report a profit, or a loss, at the end of the year.
The difference between your P&L and the balance sheet
The balance sheet is often confused with the P&L, but it’s a very different view of your finances.
Your balance sheet shows you the company’s assets, liabilities and equity at a given point in time. If you’re not a trained accountant, that description may not mean much to you, so let’s quickly highlight those three key areas of the balance sheet:
- Assets are what the company owns (cash, equipment/machinery, property etc.).
- Liabilities are the things you owe other people (bank loans or money you owe suppliers).
- Equity in the business comes from the cash invested by the owners, plus any income made (or losses incurred) over time.
The P&L and the balance sheet both show historical financial information but from two very distinct and separate perspectives.
Your balance sheet shows you what the company is worth, based on the following accounting equation: ‘Equity= Assets-Liabilities’
Your P&L shows you how revenues and costs have fluctuated over a defined period.
The P&L shows you how you’ve performed over a period, and the balance sheet shows you how this impacts the value of the business.
Profit and loss forecasting – the benefits
The more oversight you have of your finances, the better you can manage the future direction of your business – and being able to look forwards is an indispensable ability to have.
Your cash flow statement is critical to this and differs from the P&L in a key way. Cash flow shows just the specific cash inflows and outflows in the business, whereas the P&L and balance sheet covers all revenues and costs – not just those relating to your liquid cash.
By reviewing your P&L and balance sheet along with a cash flow statement, you can see a complete financial overview.
That allows you to answer some vital questions; for example:
Will we be able to meet our profit targets for the next quarter?
Do we have the cash flow needed to fund our expansion plans over the next year?
Are we in a financial position to pay dividends at year-end?
By using forecasting, you’re no longer just looking backwards at historical actuals and guessing; you’re able to get an accurate picture of your future financial position.
Looking to the future of your finances
The latest cloud accounting platforms all give you the ability to quickly produce a P&L and balance sheet. And when you combine this real-time accounting data with a cash flow forecast, you have a powerful look into the financial future.
Smart forecasting tools make it easier than ever to get a clear, real-time oversight of your finances.
With financial forecasting, the company has:
- Greater accounting integrity – with your forecasting driven by the accurate real-time data in your P&L, balance sheet and cash flow statements.
- Increased confidence in your financial position – so your business decisions are driven by the most informed and insightful information and forecasts.
- Real financial stability for the business – removing the uncertainty and giving you solid foundations to build on, both now and in the future.
- A more attractive outlook for investors – with your detailed accounts and forecasts making the business more attractive to potential investors, lenders and buyers.
So, dive down into your profit and loss by integrating with the best in forecasting tools. If your statement highlights a need for further investment, you might want to consider taking on a business loan to finance the future of your business.
