This article will help you breakdown the basics of a profit loss statement and how it can help your business.
A profit loss statement allows you, the owner to dissect their financial information and make changes for the upcoming reporting period. A profit loss statement is a financial statement that outlines the income and expenses during a specific period.
As humans, we want to measure our growth, to one day look back and see how far we’ve come. Our metrics became a way for us to continually measure our growth, to see how far your business has come.
How do you define success? Do you measure it by distance traveled or what you achieve? KPI’s or key performance indicators is a type of performance measurement. These measurements can help evaluate the success of a business or even an individual activity. In a profit and loss report we call this your business metrics. Your metrics are unique to your business and when you know which activities to measure, you can evolve, and build on them.
You can break down how many man hours your spending in order to meet sales goals for the quarter. You seperate expenses from operating expenses, and employee salaries to gauge where your money is being spent.
Without supervision, you allow chaos to thrive but as an owner, it’s your duty to add order into chaos. That’s what we are, that’s what society is. It’s wonderful that we are able to collaborate every day in different ways. We turned order into chaos.
The profit and loss report can be summarized as an equation of metrics that can give yo
It shows a breakdown of expenses incurred, and what costs ate into your overall profit.
This report can help you identify any differences in your financial projections and actual profit. Let me explain.
For a single quarter, you were projected to net a total of $2,739 in profit. However, when you take a look at your profit report, you notice that you only profited $947.
Based on the financial analysis done by your accountant, you identify various expenses that were unplanned. If you’re unable to identify any differences, you should contact a professional to assist you. The account managers at Anguiano Consulting can provide an excellent breakdown on any differences you don’t understand.
For the next quarter, your profit is projected at $793. However, your profit report indicates your gain is $2,147. Should you identify the differences? Yes, you should.
We hardly manage our money when we are making it but the more you handle it, the more you’ll save.
What if the difference had to do with a bill that wasn’t paid. Your profit report can catch this so you can avoid any unnecessary fees.
At Anguiano, we offer 1 on 1 financial business coaching to help you understand your numbers. Using a live visual call, we will break down your profit loss statement until you know it.
The profit loss statement is also known as the income statement. Below is an example of a quarterly income statement from Coca Cola. They also can be converted to annual per the below.
The income statement starts with revenue and ends with the net income.
Net Income = (Revenue + Gains or additional income) – (Expenses + Losses or additional expenses)
How to read an income statement
The first section is revenue, the above statement indicates that the gross profit for 4th Quarter 12/31/2018 is $4,337,000. Gross means before taxes.
Gross profit is the total revenue minus the cost of revenue.
After revenue is your operating expenses. In total, there are $2,701,000 in operating expenses under Sales, General, and Admin. The operating costs are deducted from the gross profit for a total of $1,636,000 in operating income.
This can also include marketing, advertising, or promotion related to the goods or services you’re selling.
The next section is income from continuing operations, this includes one time earnings (income or expenses), interest expenses and any taxes. This will give you the net income from continuing operations for Coca Cola. These include employee wages, salaries, office expenses, rent, business insurance and other items that would be required to operate.
EBITDA or better known as Earnings before Interest, Tax, Depreciation, and Amortization. Not all income statements will contain an EBITDA.
Amortization and depreciation expenses are non-cash expenses created by accountants to stretch out the cost of capital assets. This would include any property, plant, and equipment, which are basically long term, fixed-assets.
Other expenses may include things that are specific or unique to your industry. This can include research and development, stock based compensation, gains or losses from selling investments, and many more than are company-specific.
Any events that aren’t recurring are removed to give us the Net Income applicable to common shares.
Monthly and Quarterly financial reports are a useful tool for any CEO.
You might be wondering how I have Coca Cola’s income statement for 2018.
The Securities and Exchange Commission (SEC) has reporting requirements for any public company with a class of securities registered under Section 12 or Section 15(d) of the Securities Exchange Act of 1934.
In English, federal laws require publicly traded companies to disclose information on an ongoing basis.
The SEC is an independent federal government agency whose role is to protect investors, maintain fair and orderly functioning of the securities markets, and facilitating capital formation.
Income statement role
The income statement provides more than the necessary numbers. It serves management as a tool and allows you to adjust based on these insights.
This includes the fundamental operations, the efficiency of management, or areas with unnecessary expenses and operating costs.
Based on this statement, management can expand, push specific campaigns, shut down departments, or discontinue product lines.
While your company in Hesperia will not have Coca Cola’s numbers, you can use your income statement to help grow your business. Our Accounts can assist you in preparing and analyzing your numbers through strategic accounting.
Although there aren’t many publicly traded companies in Hesperia, it doesn’t mean you can’t benefit from an income statement.
Income statements allow you to look at a company’s financial history. Think of it like your carfax report, except it’s full of numbers. The numbers might not mean much to you, but to a trained professional they can paint a story.
Questions to ask when reviewing your income statement
It’s likely you’ll be reviewing your income statement with your accountant. As your accountant explains your profit or loss, these are the questions you should ask when receiving your income statement.
The first questions you need to ask are questions to yourself.
Do you understand why there was a profit or loss?
Understanding the basics of your profit loss statement is necessary. An income statement is like a map to your businesses profit or loss. By analyzing the numbers contained you should be able to identify why. If you are unsure, this is the first question you’ll ask your accountant.
What information would be the most beneficial for your accountant to review with you?
You might not need all of the information, sometimes you only need to know specific numbers and how they change. This is because items like payroll are a necessity and can cause a major impact to your business if it gets out of hand.
Whereas your internet subscription service is a fixed price of $30 a month. The focus should be on what areas are going to make you the most money and what areas will cost you the most.
Questions to ask your accountant.
Are there any areas I can cut expenses that are unnecessary for my profit?
This is fairly easy for a trained accountant to identify. Understanding the industry gives us one major advantage and the next advantage is we do it naturally. We build your profit loss statement from the ground up and the individual entries in the general ledger were likely made by us.
Not only did we build the report, we were the ones that made it possible to create. To some degree, the financial analyst has already started. We need one missing piece to the puzzle, you. You’re the one that knows the breathing activities behind your business and what changes it can transition to safely.
How much should I be saving?
How much you should be saving as the business owner is one of the most common questions. Saving is more of a habit than an amount and you should instill the habit. The question you should be more concerned with is, “how should you be saving?”
Managing your money is much more important than collecting it. Because there are so many financial vehicles at your fingertips today you should do your research and make your money grow. If it’s sitting in your account doing nothing, it’s practically worthless.
What should I do differently?
This is a general question but one that most of us are faced with when lost. What should I do differently that would change the results I’m seeing? That’s what we really mean.
The best tool in your control is your income. If you want to do something differently, the first thing we look at is how can we make more money. Can we serve more people or can we expand our product to reach more people? The answer is always yes, if you have value to offer.
The answer is always yes, if you have value to offer.
Questions to ask when reviewing your income statement
It’s likely you’ll be reviewing your income statement with your accountant. As your accountant reviews your metrics there are questions you need to understand.
Do you know what your income is from?
Knowing of a profit and knowing where a profit comes from are two different things.
Knowing of a profit indicates you understand the number but knowing why means you know where the money came from. Let’s say you made $10,000 this month, or $10,000 is indicated as income.
After expenses your net income is $4,000. After some digging, you find out your receiving a loan payback for $3,000. That means $7,000 of your income was under operating income and the $3,000 really wasn’t related to your income. If you’re not sure what do you ask?
Can you explain to me, why we
have a positive net income on this profit report?
Can you explain to me, why we have a positive net income on this profit report? Simple, elegant, and you gain understanding.
We separate receipt and revenue to help you understand. Revenue is when you make a sale of either your product or services, revenue is the most common source of income. Receipt is when cash is received or collected and not typically related to revenue.
Gains are also different, gains are received from the sale of a long-term asset. Alternatively, losses are from the sale of long-term assets.
Where is my highest expense and is there anything I can cut?
Your accountant is always doing this, cutting expenses to increase profit, whether you like it or not. We can’t help it. We see how the numbers connect to the livelihood of a business and we understand it.
Your highest expense isn’t usually negotiable. It’s something that’s needed such rent, food, or even utilities. But the secondary and miscellaneous expenses are most of the time, unnecessary which is why they aren’t needed. It’s just something that’s nice to have. Understanding assets and liabilities will help your business keep wealth.
If the loan payback didn’t come in the net income would be $1,000. What feelings do you experience when you see a difference in what you think you profited?
Understanding the difference is more helpful than identifying it, because a difference might be an error in your perception. Identifying holes in our perspective is how we grow.
The last one isn’t a question but a statement, “I’m lost.” We are so afraid to admit we don’t know something and instead, it ends up costing us. If you truly don’t understand the numbers, you need to voice it.
By understanding your lost, we can find you, and guide you. Understanding your business is more important than the pride of not knowing information.
Other powerful business tools
A profit loss statement is just one of many powerful tools for your business.
A cash flow statement is a tool that gives you better visibility of cash on hand, you can read about it here. Cash flow is the money moving in and out of your accounts. Cash flow is flexibility in your business and your personal life. Remember money is like air, when it’s in abundance we can breathe, but when it’s scarce.
“A budget is telling your money where to go
instead of wondering where it went” – John Maxwell
A live visual call can be one of your most valuable business tools. With a live visual call, we can review your profit without having to stop operations. No need to travel for meetings, a quick 30 minute call is more than enough to help you understand your numbers.
Summary for profit loss statement
An income statement is one of a few important financial statements that can provide insights into different parts of any business. It summarizes the income, expenses, and operating costs during a specific period.
A profit loss statement is the same thing as an income statement.
A profit loss statement is a benchmark tool for any business, because businesses bring complexities, a complex report helps translate the day to day activities. Even with the best tools, you need an expert translator to help guide you through what this report means.
Accountants can draw their own conclusions in different financial reports but are those conclusions assisting your bottom line? Speculation is more about preference when analysis is really about finding the appropriate tool to create a solution.