Cfo Services | Interpreting Profit And Loss Statements
Many entrepreneurs do not understand how to operate businesses says CFO services, they get into business ownership because they are very good at providing the products or services that their business is selling, but few entrepreneurs have previous business ownership experience, which presents challenges when they need to understand their business finances in order to make a financial decision. Understanding profit and loss statements in their business can be a huge help to business owners especially when they need to understand their finances in order to make big decisions in the company.
Before they look at their income statement, entrepreneurs should get into the habit of looking at their balance sheet first in order to compare the two statements. CFO services says there may be obvious errors on the income statement that become even more obvious when entrepreneur looks at their balance sheet from the start. It is especially important to keep in mind that interim statements are not as strictly checked for errors the weight year-end statements are, which can lead to the statements being incorrect in places. When a business owner looks at their balance sheet first, they have a better idea of what they should be able to find on their income statement.
Another tip an understanding profit and loss statements, says CFO Services is that entrepreneurs should be looking at their six month comparative profit and loss statement instead of the month-to-month statements. This is important because there may be circumstances that happened in only one month that is unusual, and by looking at a six month comparison of the business owner an idea of each month overall, instead of trying to determine trends for only one month.
When creating the income statement, business owners should understand that having too many subcategories in their income statement can make reading it far more difficult. The income statement is most powerful when it is one page because it is easy to read. There are too many subcategories, it has too much information in it and usually cannot be contained on one page.business owners should understand that they will have the ability to break their income statement down into subcategories when needed, but they should avoid putting too many subcategories on their income statement sheet to begin with. Not only will this help business owners read it easier, it also help them stay consistent on the categories.
Another tip for income statements is that business owners should arrange it so that it is in numerically descending order so that the most significant cost items end up at the top of the report and the least significant items are at the bottom. CFO services says that this way, business owners know how they can affect their bottom line the easiest, which is by spending time minimizing the expenses that fall to the top of the list. It may be tempting for business owners to reduce costs on the items that are at the bottom of the list, and will cost minimization is never a bad idea, business owners should understand that they will have a lower return on investment in spending time on the bottom items.
It’s extremely important for business owners to understand their business finances throughout the year and operating their business says CFO services. This is because often business owners need to make very important financial decisions quite quickly in their business, and if they understand their financial reports, they will be better armed to make those decisions. When business owners don’t understand all of their business finances, they are at risk for making poor decisions that can negatively impact their business.
There are some terms that entrepreneurs should understand when they are looking at the business finances to help them determine their meaning. Business owners should first understand the difference between direct cost and general expenses. Direct cost is cost that is incurred as a result of doing work in the business. Direct cost includes labour and supplies. An easy way for business owners to think about it says CFO services, is if there were products or services that were delivered, those bills associated with creating them is considered the direct cost. For general expenses, those of the bills of the business that exists whether a business owner sells product or service or not. This is the overhead of the business, and typical bills associated with general expenses are rent, office supplies and administration staff.
Entrepreneurs should consider the percentage of the revenue when they are analysing the direct costs of their business. Without considering the revenue, when the direct costs go up, it may be difficult to understand if the costs are out of control unless a business owner looks also at the revenue. As long as the direct costs are going up proportionally with the revenue there is nothing to worry about. If the costs actually are out of control, CFO services says the revenue won’t go up the same amount.
Other terms that business owners should understand when they are looking at their profit or loss statements is what the differences between gross profit and net income. CFO services says that gross profit is all of the revenue in the business, without taking into consideration that the bills that were acquired in the business. The net income is what the prophet of the business is once all of the bills are paid. Understanding the difference between the two, business owners can tell a difference between all of the money that was brought into the business versus all of the profit in the business.
By being able to understand the various terms associated with profit and loss statements, business owners can be in a better position to understand their statements, and make better business decisions in their own business based on the reports that they can run in their business says CFO services. Understanding their own finances goes a very long way to helping them make good business decisions