Whether you are starting a small business or are a solopreneur, there is a bunch of legal paperwork you need to deal with.
Some legal work focuses on permits and regulations, while some are more centered on your business financial reports, such as profit and loss reports and balance sheets. All of this paperwork can give us a bit of a headache, mainly if you aren’t accustomed to dealing with these reports.
There are three types of financial documents essential for any type of business: your balance sheet, cash flow statement, and profit and loss statement. These documents are all important because they give business leaders and investors an idea of your business’s financial health.
If you’re a new solopreneur, it pays to understand what a profit and loss statement requires. You’ve come to the right place because this article is the ultimate business owner’s guide to a profit a loss report.
What is a profit and loss report?
Profit and loss reports have different names; some call it an “Income Statement”, “Revenue Statement”, “Statement of Financial Performance”, and “Operating Statement.” These terms generally mean the same thing, but what do they actually do?
A profit and loss report gives you an overview of a business’s revenue, expenses, and net income during a time, usually made quarterly or annually. Because it can vary for different industries and businesses, there is no single or correct template to follow, but there is a generalized idea that each company should know.
Business owners and solopreneurs hire bookkeeping and financial experts to create the necessary reports needed by their business.
Profit and loss report skeleton guide
Your profit and loss report’s revenue section details the total income that your business makes and lists all the revenue generated through sales, money received through assets, and tax refunds.
2. Cost of Goods Sold
If your business offers products, there’s a great chance that your product’s production and manufacturing aren’t free. In the Costs of Goods Sold (COGS) sections, you identify all manufacturing expenses to figure out how much revenue you gained from selling your product.
3. Gross Profit
To get an accurate statement of your company’s revenue, you need to look at your gross profit since these sections account for all production expenses. If your profitability is low, you look at this section to see if your production costs are too high.
4. Operating expenses
To know the cost of running your business, you should check your operating expenses or OPEX. In this section, you’ll find all operational costs such as payroll, transportation, utilities, equipment, leases, and more.
5. Net Income
The bottom line of the profit and loss statement and probably the most important is the net income section. This section states your company’s quarterly or annual profit, accounting for all of your expenses, taxes, and total revenue.
Analyzing your business’s profit and loss report
Business financial reports are critical. Now that you have completed your profit and loss report, it’s time to analyze it to make the necessary business adjustments to improve your company’s operations and promote growth.
If your company made profit, consider reinvesting the money, saving your earnings for “rainy day funds,” or increasing your employees’ salary and bonuses. However, if your company lost money, don’t be disheartened. Instead, use this as an opportunity to develop strategies that will help your business grow and develop correctly.
On the other hand, if you lost money, understand where you went wrong and use your profit and loss report as a tool to determine areas in your business that need improvement or cost cuts.
Although it can be quite tricky and tedious to work on your business financial reports, investing time to build a profit and loss report is essential if you want to promote business growth and you’re seeking expansion.
Now that you know the fundamentals of a profit and loss report, work with financial and bookkeeping experts to help you deal with all your business financial woes.
Are you a small business owner or solopreneur who needs help with business financial reports? A4E has you covered.
Our mission is to eliminate the stress of bookkeeping, taxes, and other financial responsibilities so that our clients can focus on growing their business. We can help you manage your accounts! Learn more about our services today.