Can you imagine owning a business and not knowing how much profit or loss (P&L) you made? This happens to many entrepreneurs and it’s because they don’t know what profit and loss statements are.
Don’t worry, you are not the only one who is intimidated by accounting. The reality is that corporations run a lot of numbers that are important to both you and the government.
If you don’t know what these numbers are and how you can manage them, you’ve come to the right place.
Pay close attention because we will show you in simple terms how profit and loss statements work and what data they carry. Don’t miss it.
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What is the profit and loss statement?
The P&L statement is a document that shows the current financial situation of your company. It forms a trio along with the balance sheet and the fund statement and each is required by law.
The P&L statement details the amount of income and expenses you had in a specific time period. This can range from a month, quarter, semester, year and more.
The following formula is used to find the results: Income or sales – expenses. This operation shows the net profits or revenues that were obtained in that period of time.
However, the P&L shows you much more than that. It’s actually able to break down each of the different income and expenses you have in the company so that you can determine what the current situation is.
Why is profit and loss marketing important?
First we must tell you that the government requires different types of accounting documents to verify that your business complies with the requirements of the law, so in one way or another you must use the profit and loss statement.
But, the most important thing is the information it gives you. The P&L informs you about every single incoming and outgoing movement in the company regardless of its nature.
That’s why it’s a fundamental item to know about the real economic situation of the corporation.
Forget about hidden numbers or transactions that appear only at the end of the month. With the profit and loss statement you will have that x-ray that every businessman needs.
Results that are handled in the profit and loss statement
There are a number of results that are calculated before you get the final profit and loss figure. Some of them are:
1. Operating income
First we find the operating result, which is the income obtained from the sale of products and services that the company has in inventory.
2. Financial result
Then there’s the financial result. We can say that it’s the difference between the income from investments and the expenses they generate.
3. Profit before tax
It’s very simple, it is the sum of the financial result and the operating result.
4. Income for the year
This is the profit or loss after taxes have been added.
How can I control my company’s profit and loss?
Controlling your company’s profit and loss is one of the most important tasks you have as an entrepreneur. Any mismatch in these items will cause an administrative mess that could even lead to bankruptcy.
Let’s take a look at some actions you can take to keep both items on track:
1. Taking inventory
It’s not just about having an inventory, it’s about keeping close track of it.
It’s important that you set up an administrative system so that there’s order at all times. You need to know how many units of each unit exist, for how many months there is availability and where they are located.
No item can be lost, so they must all be accounted for so that there is a backup at the time of any inconvenience.
2. Analyzing each of the line items
Income and expenses come from specific line items that need to be studied.
That is why it’s essential that you write down every sale and every payment you make, no matter if it’s to a supplier, debt, etc. This will help you determine where the problem lies and establish strategies to reduce those items.
3. Segmenting profits and losses
Closely linked to the previous point. We recommend that you segment each of the income and losses you have according to their nature.
You can divide profits by interest, return on investments and product sales. On the other hand, expenses will come from debt payments, operating costs and much more.
4. Calculating gross profitability
Gross profitability is very important and in most cases is calculated as a percentage of sales.
This shows the profitability that the company works with every time it sells a product. This way you’ll know if you’re getting the amount of profit you want for each unit sold.
5. Calculating net profitability
Once you get the operating profit you must subtract indirect expenses such as administration costs, marketing, advertising campaigns and much more.
If you apply these actions you will have your expenses and income under control. The most important thing is that you know where each number comes from so that nothing comes as a surprise at the end of the month.
Why should I make a profit and loss statement?
Beyond the legal aspect that involves the accounting area of any company, the reality is that the profit and loss statement is of vital importance for a company.
You cannot plan for the future if you don’t know how much money is coming in from the sale of products, services or investments. Your duty is to keep the accounts in order to make accurate decisions that ensure the stability of the business in the medium and long term.
What’s the key? Use an administrative system that allows you to add data and to do the calculations on its own. Today there are many alternatives for all budgets.
Don’t forget to hire a qualified professional accountant to help you with the paperwork that takes up so much of your time. The profit and loss statement could be one of them, so leave it in the hands of professionals and you will see the changes.
What do you think about P&L Marketing? Leave us your comments, we want to know how your experience has been in this important area.