Understanding Profit and Loss Report
Firstly, a profit and loss account is called other names; income statement, earnings statement, revenue statement, or an operating statement. Every public company must release the profit and loss statement along with the cash-flow statement and balance sheet annually. In the profit and loss account, you’ll find the revenues, expenses and profit or losses over a specified period. In precise terms, the profit and loss account explicitly state a company’s ability to generate sales, manage expenses and the possibility of profit or loss. Profit and loss account is guided by accounting principles such as revenue recognition, accruals, and matching.
A profit and loss account is prepared over a specified time frame; monthly, quarterly, bi-annually or annually. Regardless of the organization, a profit and loss account is built upon the simple accounting formula;
SALES – COST= PROFIT OR LOSS
Both sales and cost are given different names in the profit and loss account. This makes the preparation of the profit and loss account difficult for anyone without an accounting training. However, this can be surmounted through online accounting software which is already built to recognize revenue sources and expenses.
The beauty of a profit and loss account lies in its ability to spell out in figures areas of success and struggle in the business. Through this, business owners and managers can monitor the activity of the company and proffer solutions in the event of a loss. For an investor or a prospective investor, the profit and loss account give them a clear picture of the financial health of your company. It gives them the financial standing of your business.
Every profit and loss is segmented into revenue and expenses. The revenue of your firm provides a detailed explanation of the income from all primary and secondary activities the business is involved in. This is also the case for the expenses which can either be primary or secondary. Of course, the most critical revenue that will determine your profit or loss is the income generated from sales as other secondary income can be unpredictable. Growth in your business will be a reflection of the revenue generated from sales.
For the expenses, two items must stand out; the cost of goods sold and the operating expenses. Through a cloud accounting software, you can monitor the cost and look into areas where you can reduce the cost to increase profits. For example, when you compute your profit and loss account using myBooks online accounting software, you can ascertain how much you are spending on raw materials. This will let you know if you need to change to another supplier to tackle cost.
Whichever online accounting software for small business you are using, it will provide the following metrics that will be utilized by your financial analysts;
- Year over Year Numbers (Horizontal analysis)
- Trend analysis
- Gross profit margin, Operating margins, net profit margin and EBITDA margin
- Valuation Metrics
- Rates of return
Profit and loss report is beyond the numbers, and it tells all the story that needs to be known about the business. Through a profit and loss account, you are able to make crucial business decisions.