One of the many financial tools that you can use to manage your business is the profit and loss statement or P&L. It gives you an overview of how much income you are generating or losing. All of the accounting services in the Philippines concur that business owners must know how it works.
Understanding this statement is highly beneficial to your business. By using the P&L, you will be able to better modify and plan your day-to-day operations and accurately predict the future of your business. Learn more about this below:
What is a Profit and Loss Statement?
It is a financial statement that will show how much income and expenses your business has incurred for a specific time period. It will include the following details: your business’s revenue less your expenses and losses. The outcome could be equivalent to a profit or a loss. Of course, as a business owner, you don’t want to see red or losses but profits.
According to tax and accounting services in the Philippines, there will be instances where you will see a P&L statement called the statement of operations/earnings, income statement, or the bottom line. This will help you understand your operations more and help you evaluate what areas are lacking. To check and see the optimal health of your business, a P&L can be used alongside key financial reports like the cash flow statement and the balance sheet.
2 Ways Small Business Owners Can Present Their Net Income
There are two ways you can present your net income. Which method you chose will hinge on the type of business you operate. Tax services in Manila say that the most important factor here is accuracy of all the accounting records because they serve as the basis for the computation.
- Single-Step Profit and Loss Statement: uses a single calculation to compute the net income. Compute the total revenue and subtract the total expenses to get to your net income.
- Multi-Step Profit and Loss Statement – requires multiple calculations to get your net income
|Components of Profit and Loss Statement|
|Revenue||can be measured through cash basis or accrual accountingline of revenue is at the top of P&Lmarks total revenue accrued during the time frame|
|Cost of Goods Sold (COGS)||represents the cost of your business to deliver the goods or services to your customersincludes direct expenses (materials, labor, and shipping)excludes indirect expenses like rent and utilities|
|Gross Profit||to get gross profit, subtract the COGS from the total revenuedoesn’t fully indicate your profits since it doesn’t include overhead costs like rent|
|Expenditures||direct expenditures are items that have a direct relation to the product or serviceindirect expenditures are items that can’t be traced to producing a product which can include overhead costs|
|Operating earnings||measures how profitable your business is, without taking into account the external costs such as interest payments, taxes, depreciation, and amortization|
|Interest Expense||total interest paid to creditors for a specific period|
|Earnings Before Income Tax||profit before paying income taxes|
|Income Tax Expense||shows how much tax you paid on your income|
|Net Profit||deducts all the expenses from the total revenuereveals total profit|
|Net Loss||happens when total expenses are higher than the revenue and exceed the incomeindicates that you did not make a profit at a specific period of time|
Analyzing Your Profit and Loss Statement
Here’s how you can read and understand your P&L:
- Check the last line of your P&L
To find out how your business is doing, take a look at your P&L’s bottom line. It will be red if your expenses are greater than your income and black if your income is greater than your expenses. Net loss does not necessarily mean your business is in big trouble. Instead, it means that there are areas that might need more attention to not make any more losses.
- Check your income streams and expenses
Ensure that your expenses are making sense. Check your income streams and expenses. Assess whether or not your sources of revenue are in line with your business goals. Find out if it increased continuously or if it increased one time. Evaluate whether the increase or surge in profit came from gradual growth or from an event or promotion.
- Compare your P&L statement to previous periods
Compare your P&L statement to previous income statements to check if there’s a trend or to see if there’s any anomaly taking place.
- Double-check the numbers
Double-checking is crucial. If you are using a spreadsheet to review your P&L, make sure to double-check to ensure that you did not accidentally change a formula. Making a small mistake in your data entry will affect the bottom line of your P&L.