Why do you need a Profit & Loss Statement for your Small Business?

Do you know if you’re making profits or losing them? As a small business owner, it might be a confusing question for you to answer. However, if you learn to review your profit and loss statement regularly, you can easily track the financial growth of your business. A profit and loss statement also known as P&L statement allows you to check if your business is generating profits or going into a loss. Here we will discuss the significance of a P&L statement for your small business and the main components that compose this statement.

What is a Profit and Loss Statement?

Also known as an income statement, a P&L statement is an important financial declaration that sums up the earnings and expenditures of a business during a particular time period. It is a usual business practice to generate P&L statements on an annual, quarterly or monthly basis. In simple words, a P&L statement informs you about the financial development of your business. The information acquired through a P&L statement is useful in determining whether your business is stable enough to cover its expenses and costs and is still left with money that could be taken as profits. 

Importance of a Profit & Loss Statement for your Small Business

A P&L statement is significant in evaluating the performance of your small business and, sequentially, its success. This statement lets you identify where you’re spending the most and where you can make reductions to avoid overspending. It also helps you in categorizing your least proceeds streams so that you can come up with well-versed business choices such as costing of your products or services. Moreover, when your business is generating good profits, a P&L statement can inform you about your highest revenue streams in order to help you in focusing on activities that could make more money for your business. Thus, a P&L statement can lay out your business progress, show sales tendencies and provide insight on how to make smart moves in your business.

Major Components of a P&L Statement

Every P&L statement varies with respect to the expenses and income of a business; however, there are three major components which are included in every P&L statement, which are:

1. Revenue or Income

It refers to the business proceeds or the money you make from the key activities of your business such as selling services or products. The P&L statement will also be composed of your non-operational proceeds or other revenues that are made other than your fundamental business processes. This consists of revenue generated from strategic alliance income, rental payments and interest received on working capital. Besides, the P&L statement also includes profits gained through one-time endeavors resulting in income generation; for instance, selling long-standing assets like land or vehicles etc.‍

2. Costs or Expenses

When you review a P&L statement, the cost of sales and the cost of producing goods would be the first expense you’ll see. The cost of goods sold means the expense of making a product which is sold by a business. This includes labor and cost of raw material etc. Then, there is the primary expense which denotes the expense of running business operations including utility bills payment, employees’ salaries and sales commissions etc. In addition to these, a P&L statement also includes some secondary expenses which are related to other business activities such as legal dues payment, loan or interest payments and penalties or tax payments etc.

3. Net Revenue or Income

Lastly, the P&L statement will give you a net revenue number. If your business is doing well and earning profits, this number would be positive. However, if you’re spending more than what you’re earning then this number would be negative. As a small business owner it is imperative for you to know that net revenue or income comprises all expenses, even those which are just one-time costs or unusual costs too. This number, as a result, will inform you if you’re making or losing money in your business during a specific time period. Though, if you wish to evaluate the daily operations of your small business, then the net operating revenue would help you more.

To sum up, small businesses are usually centered around their bottom line. Thus, in order to validate that you can manage your business funds, it is important to maintain and analyze your profit and loss statement. In this regard, an automated accounting software like LedgerMax can help your small business by showing your P&L statement and letting you check the expense and income details for the period anywhere anytime. LedgerMax helps in improving your P&L and eventually in keeping your small to medium sized business on the way to success and profitability.

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