Cfo Services | Making Sense Of Profit And Loss Statements
Entrepreneurs who make significant financial decisions in their business, without completely understanding their profit and loss statements, tend to make decisions blindly, and aren’t able to predict how those decisions will affect their business says CFO services. Since many entrepreneurs go out of business due to running out of money, business owners should take care to avoid making decisions without being properly informed first. Understanding how to read their profit and loss statement is a great place to start in order to make informed decisions in their business.
One of the first things that an entrepreneur should do is look at their balance sheet before they look at their income statement says CFO services. This is in order to check to see if there are any obvious errors on the income statement. The looking at the balance sheet first, entrepreneurs can more easily see obvious errors that exist. This is especially important to do with interim statements, because those are less strictly checked for errors the way year-end statements are. Entrepreneurs can look at their balance sheet first, and then move on to the income statement to be of their financial decisions.
Another way that entrepreneurs can help you understand their profit and loss statements, is by looking at a six-month comparative profit and loss statement. By reviewing this six-month comparison, business owners are able to see errors much more easily, or see if there have been any anomalies that have occurred in one month or another. It’s a quick and powerful way to compare their numbers says CFO services.
Business owners should also know that when it comes to their income statement, the power it has is in its simplicity. Many business owners try to provide an overabundance of information, but too many subcategories can make this statement have too much information on it, which can be much more difficult to read says CFO services. It then turns from a powerful one page report to multiple page report that’s hard to read. Business owners should ensure that they are keeping things simple on their income statement in order to be a great decision-making tool for them.
Entrepreneurs should also ensure that their income statement is listed in numerically descending order. This way, the items that appear at the top of the list have the greatest impact on a business owner’s bottom line. Often the top two items and that being their rent and their administrative salary. If business owners are able to affect changes on any of the items that appear at the top of the list, they will significantly impact their bottom line. CFO services says that it might be very tempting for business owners to spend a lot of time working on the expenses are at the bottom of the list, and while business owners will be able to save some money, it won’t impact their business as greatly as making changes at the top of their income statement.
Understanding business finances can be extremely difficult and confusing for many entrepreneurs says CFO services. However, business owners are going to make important financial decisions based on their profit and loss statements, they need to ensure that they either know how to fully understand them, or else risk making decisions that are not beneficial to their business. Since 50% of all businesses go out of business in five years, and 29% of those entrepreneurs will say that their business failed because they ran out of money. By making an informed financial decisions, business owners put their business at risk.
By understanding some terms, business owners can start to understand what is listed in their profit and loss statements, so that it starts making sense says CFO services. Business owners should understand the difference between direct cost and general expenses. General expenses are the expenses that are going to exist in the business whether they are producing products or services or not. CFO services say that general expenses are often classified as a businesses overhead. Their rent, administrative staff and utilities are included in the general expenses. While the direct cost is only incurred in the business when a business is producing goods or services. These are the cost of labour and supplies. Without these bills, the business would not have any products or services to sell.
Business owners should also understand the difference between income and gross profit says CFO services. Net income is what the prophet is in the business once the bills are paid, meanwhile gross profit is all of the revenue that the business brings and without taking any of those into consideration.
Business owners should also understand that it is important to consider the percentage of revenue when they are analysing their direct cost. The reason for this, is because if they don’t take into consideration the percentage of revenue, and can often look like their costs are out of control. But direct costs should go up proportionally based on revenue. If the costs truly are out of control, the percentage will be able to tell them quite easily by not going up the same amount.
It’s also important that business owners should understand that a negative number on their income statement usually indicates that a mistake has been made. Mingling with the income statement, business owners are generally looking at income and bills in which doesn’t usually get expressed by a negative number so if there is a negative number on this report, it’s usually because there has been a misclassification of some information. Business owners can take this and ask questions to ensure of the report is accurate or not.
The getting really comfortable with how to read profit and loss statements, as well as the language used in them, entrepreneurs can start to be able to determine the information in them, and how to read them effectively says CFO services. When the understand them, the financial decisions they make in their business will become much more meaningful, running a business owner to make a decision without negatively impacting their business.