We’re continuing our series “unpacking accounting” with this quick and easy rundown of what an Income Statement (or Profit and Loss statement) is and what it means for your business.
An income statement (or P&L, which we will use interchangeably) is a helpful measure of a business’ financial performance within a certain accounting period. This differs from a balance sheet (you can read our article “What is a balance sheet” here) in that the income statement shows performance over a certain duration of time while a balance sheet only captures a moment in time.
They are both helpful and necessary documents for a business owner, investors, and buyers to evaluate. A balance sheet, income statement, and a statement of cash flows are the three important financial statements that a publically-traded company must submit to the Security and Exchange Commission (SEC). Regardless of whether your company is a public company, though, the statements are helpful in the case of an audit, seeking loans, seeking investors, or simply when making managerial accounting decisions internally.
Investopedia defines a profit and loss statement as “a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss over a specific accounting period.”
But, this is still a little jargon-filled. So, let’s break that down.
What does the P&L Show?
The income statement shows the profitability of a company during a certain time interval.
How do I read the Income Statement?
The statement is going to show first your revenues and gains and then secondly your expenses and losses. They will then have a bottom line. A positive bottom line shows a net profit and negative? Well, you know the drill. If you want more information on this Accounting Coach has a great article on the difference between revenues and expenses.
What do I do with that information?
That really depends on your business and how it is structured. You might want to see your income broken out by the department, product range, or sales channel. The most important thing is that you think it through and decide what information will truly be valuable. If possible, you will want to break up your Cost of Goods Sold in such a fashion that each income category has a corresponding cost. This would allow you to know how profitable each area is and if they are performing well over time. If you are testing out new ways of managing your business and your P&L shows a net loss (meaning you brought in less money than you spent) you should reevaluate those decisions.
The most important thing to remember is that the P&L should “speak” to you. When you look at it, it should tell you how a department, product line, or sales channel is doing and which areas need attention. If your P&L doesn’t do that, we should talk!
Do I REALLY Need this?
We think that all businesses, large and small, need to be on top of their financial statements. All successful entrepreneurs need to master how to read a P&L and how to use it to make better business decisions so that their business will grow profitably. The complexity of the accounting and the structure of the financials might change over time, but at the end of a day, you’ve got to know your numbers to grow a strong business.
Our highly educated and experienced Financial Operations Associates (a fancy term for bookkeeper/accountant) is capable of helping any business owner with the creation of, and understanding of, these documents. If you are interested in exploring the potential of working with us further – schedule a meeting here.