What is a Profit and Loss Statement?
(and why do you care?)
You get income. That’s good. You have expenses. That’s life. The object of the game is that your income is greater than your expenses. You already knew that. The question is are you winning the game? And how do you know?
If you’re like most overworked business owners, you gauge it by whether there’s any money left at the end of the month. Or if you haven’t had any credit cards cancelled lately.
Here’s another question: What in your business is profitable, and what’s not? For example, do you really make any money on making those widgets? Or on servicing them? When you sold that property, how much had you invested in it?
A profit and loss statement is a compilation of all of your income and all of your expenses categorized in a given time period (like this month, or this year-to-date.) It gives you a clear picture of where you stand, and gives you insight on what is costing you more than it’s making. I know it sounds scary, but it’s a good thing.
In order to make a Profit & Loss Statement, you must record all of your income and expenses by categories as they occur, or if it’s too late for that (I know, I know), sit down and record them all from the beginning of the year (for example) to now. The advantage to recording as you go (besides not needing that marathon), is primarily that you will be more accurate, and are less likely to lose supporting documents, and secondarily, you will be able to make intelligent decisions about your business as you see the picture unfold (now there’s a new concept).
In the old days, these income and expenses were painstakingly written by little old ladies in spectacles into ledgers with tiny little squares on green paper, but the easier and more techie way to go is to use a computer program designed for such a purpose.
There are simple programs like Microsoft Money or Intuit’s Quicken that can perform basic tasks such as recording income and expense, and then there are programs designed more for businesses, such as Intuit’s QuickBooks, which can keep track of your bills, what your customers owe, and much more.
If you record your income and expenses as you go all year, you not only have the benefit of seeing your Profit & Loss Statement on a regular basis, but as a bonus you will be ready for your Accountant come tax time. Do you think he can take the shock? NOW GET BUSY!