Taking a closer look at profit and loss statements like this pink piggy bank
As a small business owner, you will see transactions in your business bank account. However, regular income each month doesn’t always mean your business is profitable, especially if you handle a lot of small transactions. 
Without a profit and loss statement you won’t have a clear picture of the health of your business. 
It’s sometimes also called an ‘income statement’, a ‘statement of operations’, a ‘statement of earnings’ or a ‘P&L’. It includes things like payroll, advertising, rent and insurance along with your earnings from sales and other forms of income like rent. 
It’s different from your cashflow statement which shows where money comes from and where money goes in your business. Your P&L statement summarises your company’s ability to generate sales, manage expenses, and create profits. 

What your profit and loss statement includes 

A P&L statement will normally look at income and expenditure for a month, quarter, or financial year. 
Income includes: 
revenue and sales 
interest on savings 
gains such as the increased value of your assets 
rental income. 
Expenditure includes: 
marketing and advertising 
selling, general and administrative costs 
salaries, benefits and wages 
interest payments 
communications and IT 
professional fees 
There are also non-cash expenses known as depreciation and amortisation. Depreciation tells you how much the value of physical assets such as office equipment has gone down over time due to use, wear and tear. Amortisation looks at how much the value of intangible assets has gone down during their useful life. 

Why your P&L statement is different to your cashflow statement 

Your P&L can be confusing because the total profit and loss might look very different from the amount of cash your business has generated or spent. 
This is because of some of the accounting principles that are used to categorise different types of income and expenditure. Those relevant to your P&L statement are: 
Revenue recognition – revenue can be recognised before the money is paid to your business. This is called ‘accounts receivable’ on your balance sheet. 
Matching – expenses are matched to revenue during the periods they are earned which might not be the same as the date they were paid. 
Accrual – income and expenditure should be recorded during the periods they occur, not when cash is received, which can make revenue and expenses look very different to your cashflow. 

Getting a complete picture 

To have a complete picture of your company’s financial health you will need to look at your balance sheet and cashflow statement. 
Your balance sheet – this shows your assets, liabilities, and equity at a specific time. It’s a ‘snapshot’ of your financial position and will help you to assess your ability to generate revenue. It will also show liabilities your business must meet in the future like interest payments. You will see your working capital so you will know how much cash you can access quickly if you need to. Most importantly, it will show the balance between the debt and equity your business holds. 
Your cashflow statement – this is simply the amount of cash your business has generated and used during a specific period. It will show cash from operations, cash you have invested, and any finance you have arranged for your business. It will show the net change in your cash position over a specific period. 

Understanding your P&L statement 

If you are thinking of selling your business, looking for investment or you are taking on a significant new client your P&L statement will provide an overall picture of the financial strength of your business and your tax liabilities
You can use it to compare your year-on-year figures and industry trends. You can also look at your operating and net profit margins, and return on your equity and assets. You will also have a clear picture of your earnings before interest, taxes, depreciation and amortisation (EBITDA) which is often used by lenders to decide how much your business can borrow. 
When you see changes over time, for better or worse, you will be able to understand them so that you can make good decisions for your business that will increase your profitability and reduce financial risks. 
If you would like to know more about how your P&L statement helps you to understand your business please get in touch. 
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