A P&L statement is drawn up, not only to keep the business owner informed of the finances, but it also keeps the investors informed of how their money is being spent. If a bank is about to lend a company a few thousand pounds, they can use a P&L statement to evaluate whether or not they are likely to be paid back.
A P&L statement is usually split into 3 sections: The first section displays the gross income. This is all the money that has come in before certain expenses have been taken into account. After this is the section that deducts these certain expenses. This includes the cost of running the business, for instance, costs of goods sold, operating expenses, tax expenses. Whatever money is spent on the business is transferred into this section.The final part is the bottom line. This is the net income that reads either the profit and loss of the business within the time frame set.
To ensure a smooth running of a company’s bookkeeping, regularly monitoring the P&L statement is vital. Whether you have a large business or a small business, it is worth dedicating a few hours at the end of each month to ensure that everything is on track. When starting up a business it is wise to draw up the P&L within a timeframe of 1 to 3 years. From there, the first year should include a ‘mini’ P&L statement that projects the monthly finances. Within the second and third years, expand that monthly P&L to a quarterly statement.
Everybody likes plus figures. If, after completing the P&L statement, the bottom line indicates that there was a profit made, you know you are doing things right. Continue on with this, aiming for a higher profit for the next P&L statement.
If the bottom line reads a negative number, then it’s time to review your expenses. Begin with the expenditure that bleeds the most money. If you can reduce the amount you have to spend, do it. Say goodbye to any luxuries: that could mean reducing employee work hours and taking on more work.
Photo Credit: kenteegardin