What is Profit and Loss
To make profit you simply have to bring in more money than you spend, the sales must exceed the total costs it creates at some point in the future.
Profit allows you business to be safe if anything unexpected happened, if you only generate enough money to cover the expenses, and these costs rise there could be trouble ahead. The more profitable your business the better, you will be better equipped to handle the changing environment and invest in your business too.
Profit and Loss Statement
For most businesses, relying on a cash flow statement isn’t enough, if your business manages an inventory or offers credit to customers a simple cash flow analysis can be misleading. In order to determine whether or not your sales are profitable, you need to be able to track which sales and expenses are related, by matching each sale with the expenses incurred in the process of making that sale, it’s possible to see if you’re making a profit immediately, without unpleasant surprises.
The profit and loss statement contains an estimate of the businesses profits over a certain period of time, once revenue is matched with the relevant expenses.
The general format for a profit and loss statement:
Revenue – Cost of Goods Sold – Expenses – Taxes = Net Profit
Profit and loss statements are very useful; there is a reason why accountants go to the trouble of creating them, by matching expenses with revenue, it’s easier for you to look at your company’s profitability and make decisions that will improve your company’s bank accounts in the weeks and months to come.
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