What is a profit and loss statement?
Profit and loss statements, also called income statements, are financial documents that summarize the profit (or loss), expenses, and revenues your business has accumulated during a specific time period — typically a fiscal quarter or year.
What does a profit and loss statement include?
A profit and loss statement starts with the total revenue your business generates, accounts for the different business costs, and ends at the net profit you earned after deducting all the expenses.
As a result, typical terms you might see in a profit and loss statement include:
- Revenue: Revenue is the money your business generates from selling its products or services.
- Expenses: Expenses include all the business costs you incur directly and indirectly to run your firm.
- Income before tax: Income before tax, also called earnings before tax (EBT), is the resulting number from the revenue minus the expenses.
- Net profit (or loss): Once you factor in taxes in the income before tax, you get net profit, or the bottom line.
Importance of profit and loss statements
A profit and loss statement is vital for a business as it provides you with critical financial metrics such as total revenue, expenses, and net profit. It also enables:
Performance tracking
Darryl Stevens, CEO of Digitech Web Design, shares that by diving into profit and loss statements, you can “get a clear picture of where things stand financially.”
In particular, you can monitor your business’s financial performance by tracking its revenue streams and expense categories.
Cost optimization
According to the U.S. Bureau of Labor Statistics, about 50% of startups close their operations within the first five years of their establishment.
If you don’t wish to join that list, the expense section on your profit and loss statements can be a good starting point for patching holes in your business. You can analyze where your money is going and track how your business costs respond to the outside market.
Revenue prediction
Smart business management is all about planning, and profit and loss statements give you a great way to forecast the revenues you'll be working toward in the following fiscal period.
In fact, Kamyar Shah, an established fractional Chief Operating Officer, shares: “When it comes to revenue prediction, whether a startup or not, companies would benefit from keeping track of their income statements.”
