What Is A Profit & Loss Statement Meant To Show?

Every business owner needs to have a good grip on their finances, and there are a few key areas to consider when it comes to financial performance. Cash flow is the main thing you need to be aware of, as well as income tax and your company’s revenues. If you want to know more about the assets within the company, this can be found in the profit & loss (P&L) statement.

What Is A Profit & Loss Statement?

A profit & loss statement is a financial report that businesses put together and consists of expenses, revenues, profits and losses over a specific period of time. It breaks down how well your business can generate revenue and clearly shows areas of your business which generate more profits.

The P&L statement shouldn’t be confused with the cash flow statement, but can be used alongside the cash flow statement in order to learn more about the operating income. Here are the main things that a P&L statement includes:

• Net income
• Interest expenses
• Taxes
• Marketing & advertising
• Cost of goods sold, or the cost of sales
• Revenue
• Selling, general and administrative expenses

The best way to generate a P&L statement is by using your accounting software, but it is important to understand exactly with the final figure means:

Profit (or Loss) = Total Revenue – Total Expenses

Types of Profit & Loss Statements

There are two types of profit & loss statements – the accrual method and the cash method:

1. Accrual method

Revenue is recorded using the accrual method as it is earned. This means that a business using this method records the amount of money it anticipates to receive in the future. So even if the business hasn’t yet received payment for a product or service it has delivered, this will be seen as revenue on the P&L statement.

2. Cash method

This method is used when cash enters and exits the business, and is a much more straightforward method as it only tracks money that has been paid or received. When money is received in a transaction then it is recorded as revenue, when it is spent on obligations then money is recorded as a liability. This option is much more suitable for smaller businesses that want to manage their finances frequently.

Importance of Profit & Loss Statement

A profit and loss statement shows how your business has performed over a specific period of time. A balance sheet is different in that it presents a snapshot of your current financial situation at a particular point in time. The P&L statement is one of the most important financial records that you will need for managing a growing business.

Profit and loss statements are required by law to be issued to shareholders and can be found on Companies House. They can be used to help both business owners and investors compare a business’s performance against their competitors. A profit and loss statement for each year must be produced by law if your business is incorporated. If your company doesn’t operate as a limited company then you don’t legally have to produce a P&L statement, but the data you provide to HMRC to determine how much tax you owe will still amount to the same thing.

Reviewing Your Profit & Loss Statement

Every business owner, manager, and CEO involved in job or client pricing, strategic planning, and employee compensation should regularly look at the company’s P&L statement. This will enable the key shareholders in the business to make informed decisions about expanding and scaling the business. It will allow you to easily identify the type of clients or jobs that are the most profitable to your business, and use this knowledge to help target your ideal clients and jobs.

If you would like some help when it comes to profit & loss statements, the experts at Wright Vigar are on hand to help, get in touch today.