Did you know that your financial reports are telling you a story? It’s a story about what your company does well and what it struggles with. Reading your story, aka you financial reports, will help you make informed, profitable and strategic business decisions. Most business owners know how much revenue is coming in and base a lot of their decisions on that. But that’s only part of the story. Generally speaking there are three key financial reports to your financial story. Let’s look at the first report.
What is a Profit and Loss Statement? A profit and loss statement is a financial report that summarizes a company's revenues, expenses, and profits (or losses) over a specific period. Revenues include all the money a company brings in, think sales, while expenses encompass the costs incurred to generate those revenues, think all the checks your write each month. By subtracting total expenses from total revenues, a company derives its net income or net loss for the period. This report is crucial for assessing a company's financial performance, profitability, and ability to generate positive cash flow.
How do I read a Profit and Loss Statement? To read a profit and loss report effectively, start by examining the revenue section to understand the total income generated during a specific period. Most business owners know how much money is coming in. But let’s dive a little deeper.
Cost of Goods Sold is the total cost a business has paid out of pocket to sell a product or service. It represents the amount that the business must recover when selling an item to break even before bringing in a profit. Cost of goods sold includes any direct costs that a business incurs in the manufacture, purchase and sale or resale of products. Now, subtract the cost of goods sold from revenue and that gives you the gross profit.
Next, analyze the operating expenses section. Look at all the vendors you pay, your payroll and all other costs that you need to pay to keep your business running. Now, factor in the non-operating items such as interest and taxes to calculate the net profit or loss. Now, subtract total operating expenses from the gross profit.
What does a Profit and Loss Statement tell me? Now you know the amount of money needed to run your business (expenses) and how much sales are needed to cover the costs. It provides a scorecard of a company's financial performance over a specific period. It shows whether a business is making a profit or losing money.
My hope is now you’ll see how crucial a Profit and Loss Statement is for assessing the overall health of your company. How it helps you to make informed business decisions. To identify areas of strength and weakness, and can guide you in strategic planning.
Our mission statement: TO MAKE BUSINESSES MORE PROFITABLE BY ASSISTING OWNERS IN INTERPRETING KEY FINANCIAL REPORTS AND DELIVERING ACCURATE BOOKKEEPING SERVICES.
In other words, we help businesses stay in business. Let’s talk about how we can help you interpret your financial reports and explain the story your financial data is telling you.
