While starting a home based business is easy, operating it effectively and keeping all business information updated can be quite a task, especially for business owners with no prior knowledge or interest in accounting. However, business owners can gain the right financial information required to run a successful business.
One of the key documents that business owners have to understand run their business is the Profit and Loss Statement. Here is a guide on how to read this document and why this is important.
What is a Profit and Loss Statement?
In short, this is a report that basically gives an overview of business performance for the time period of the report. All costs are subtracted from sales to calculate either the profit or loss of the business.
What is the Reason for a Profit and Loss Statement?
It is always advisable for business owners to prepare, and do their best to understand this statement simply because it is the easiest way to tell how the business is fairing. From this statement, a business owner will tell whether the business is doing well or not. They will also be able to make decisions on whether to cut down on costs or push for more sales to make the business profitable.
How to Develop a Profit & Loss Statement?
To prepare a Profit and Loss Statement for the period in question, a business owner (or their accountant) has to list all income the business receives from sales or other sources to arrive at the total income.
Expenses incurred to run the business, including the cost of goods sold, business overheads such as wages, rent, power and advertising are then listed to arrive at total costs.
The total costs are then deducted from total income to calculate the total ‘profit’ if income is more than the costs, or ‘loss’ if costs are more than the income.
Most accounting software packages that are available for small business will produce a Profit & Loss Statement. However, it is important that small business owners understand the information it contains so they can take action to improve their business.
Here is more information to help you.