Profit & Loss Statements
Constantly evaluating how well your company is doing is essential for growth and success. In order to do this, you'll have to utilize your business's profit & loss statement (P&L). The profit & loss statement will help you get a good handle on your income and expenses. Its primary purpose is to show whether or not you are turning a profit. However, it doesn't stop there. When you look deeper, your P&L will assist in showing you areas where you can cut costs or increase income. Although it is often referred to as the 'income statement,' it is a useful tool for gauging expenditures that may need trimming.
What's Included in a P&L Statement?
The P&L statement begins with what is known as the 'top line.' This is the portion that is located at the beginning of the P&L, hence the name. This section includes all revenue and sales that the company has reported. These are gross figures—totals earned by the sale of goods or services. Although it might appear that an increase in this area always equates to a profit, that is not the case. Often a boost in sales will generate more expenses, which may cancel out the growth in the 'bottom line.'
The next item is the 'cost of goods sold' or 'cost of sales.' These are items required to create the income. Here you would see such components as the cost of materials to produce the goods you sell, direct labor expenses, and direct overhead costs such as factory and storage expenditures. These costs are separated from elements such as administrative and general expenses. The P&L is structured in this way so that you can see the actual costs of producing and selling goods and services. The cost of goods sold or cost of sales section only includes the amounts for items sold and does not address inventory.
The third section is called selling, general & administrative expenses. Categories that are not related to the production of goods or services are listed here. You would see expenditures such as management salaries, rent, travel, accounting, professional fees, and more in this area.
Lastly, the final section includes marketing & advertising, technology, interest expense, and taxes.
How To Read a P&L Statement
Basically, everything below the 'top line' will be subtracted from the revenue and sales the company is reporting. This results in the 'bottom line' or the profit or loss amount. If that number isn't what you would like to see, consider your income as well as your expenses. There may be ways to cut some of the costs that you haven't thought of before. Spending less money on meals or travel is one way to change your profit margin. Another avenue to explore is lowering or cutting out bonuses. Whatever you decide to do, keep a balance of how it will impact your business—if getting rid of an expense causes a loss of income, it may not be worth it.
Why Should I Use a CPA to Prepare a P&L Statement?
Most business owners are not schooled in the area of accounting. A CPA has received many years of education in knowing how to prepare and read a P&L statement. This tool is vital to the success of your business and is also relevant when seeking investors. Also, your tax return will be accurate with a meticulously prepared P&L statement.