Profit and Loss Accounts

Small business owners operating in today’s economic climate owe it to themselves to utilise every financial tool available to them. Whilst many businesses will keep an up to date budget, fewer use profit and loss measurements to help them understand the way in which their finances are working. Despite this, a profit and loss statement can be one of the most valuable indicators of a company’s overall health, and is increasingly easy to produce using free financial software.

A profit and loss statement, simply put, is a financial analysis which sums up a company’s revenues and expenses during a particular period of time, and produces an overall ‘bottom line’ figure. The measurement period is typically a fiscal year, since many businesses are required to submit profit and loss statements as part of their reporting requirements. These include the large majority of limited companies, as well as partnerships whose members are themselves limited companies. More savvy business owners, however, will measure profit and loss on an ongoing basis, and many will keep monthly records in order to keep on top of their situation.

There is often confusion between profit/loss statements and cashflow budgeting. Cashflow budgets reflect the real-time situation of the business, and only tend to record incomes which have been actually received, or expenses which have actually been paid out. In contrast, profit and loss statements show how much money the business has made or lost in total, and includes invoices sent out for which payment has not yet been received, and invoices received which have not yet been paid. The process for reaching a profit and loss figure for the fiscal period you have chosen is not complicated. Simply put, you need to deduct your total expenditure from your total income. The latter typically splits into gross income, net income, gross profit, operating profit and profit before tax.

The advantages of being able to accurately monitor your profit and loss should be obvious for any business owner who is interested in strategic growth. Rather than simply reacting through hunches and intuition, a profit and loss statement allows the prudent entrepreneur to identify trends in his or her bottom line, and to take action to solve problems before they become major issues. If you are able to discern that your rate of profit is falling month on month, or if a particular cycle of profit and loss is obvious over a number of fiscal periods, you will be better able to prepare your business for these future trends. Similarly, a profit and loss statement will allow you to make informed judgements about the best times to invest your reserves into expansion of the business, as well as anticipating those times when you will need to increase your reserves in anticipation of a forthcoming loss. When combined with a well worked out strategic plan for your business, a profit and loss statement can put you one step ahead of your competition in making vital judgement calls in the economic arena.

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