Cfo Services | Profit And Loss Statements Demystified
If business owners get into the habit of making financial decisions without first consulting their financial statements, they can end up making business decisions that can negatively impact their business says CFO services. Business owners often aren’t able to wait for their fiscal year end financial statements to get prepared in order for them to take a look at their finances and what they need to do to increase their business. That means, business owners should get into the habit of learning how to read their interim financial statements, to help them make great business decisions in between their year ends. There are often times when businesses will need to make business decisions before they have their year-end statements prepared, so being able to confidently read their financial statements in order to make great business decisions is very important.
An extremely helpful rule of thumb that business owners should know is when they are looking at their business expenses, they need to separate their own salary from all of the other expenses says CFO services. The reason for that is because the business owners salary should not be used as a way of determining the underlying success of the business. What a business owner takes out of their business is actually a personal tax decision for the owner and the owner’s family. A business owners tax strategy should be kept out of the business expenses.
Business owners should understand that asset purchases also do not belong on the profit and loss statements. The reason for that is because even though the asset will be purchased in a single month, the cost of that will be paid over the useful lifetime of the equipment, so the amortization period should be indicated on the profit and loss statement instead of the entire cost of the asset. This way, the month that the asset was acquired won’t take a huge negative hit. This can end up making the month that the asset was purchased and be extremely negative, when it may actually have been the most successful month yet. By keeping assets out of the profit and loss statement, business owners can get a clear picture of the health of their finances each month.
Entrepreneurs should also understand that the principal portion of their loan payment will not appear on their income statement either. The principal should appear on their balance sheet, and should be reduced every month that the business owner pays some more of that balance back. Even though the principal of the loan does not appear on the income statement, business owners need to understand that it still needs to get paid just like every other expenses. This might be confusing says CFO services, because the interest portion of the loan payment will appear on the profit and loss statement.
By completely understanding how their business finances work, and how to read the reports, business owners can understand the financial health of their business, which can help them make any financial decisions they need to make during the year.
Many entrepreneurs should wait until there fiscal year end reports are back before they make financial decisions in their business says CFO services. Many businesses decisions need to be made soon, in order to impact the business. If business owners need to have enough money to buy assets, or hire people, with their marketing efforts are working, business owners should be able to read and understand their financial statements, in order to make those decisions. By making the decisions without understanding or consulting their profit and loss statements can result in disastrous results in their business.
Understanding how to read if you statements is extremely important as well CFO services. It can be an extremely powerful tool to read as long as it is set up correctly. One of the most important ways to organize the income statement is in numerically descending order. The reason for this says CFO services, is because the most significant costs will appear at the top of the report and the costs that are at the bottom don’t significantly impact the business’s bottom line. If an entrepreneur is serious about wanting to reduce their business costs, you can look at the top half of the list, and see what expenses they are able to impact. While it might be possible to reduce expenses on the bottom half of the list, business owners should be mindful of how much time their spending doing that, because they will get the lowest return on investment on their bottom line.
Business owners should also be able to identify easily if there are any errors on their income statement, and one way of doing that is by looking to see if there is a negative number on the income statement. CFO services says that usually only positive numbers will appear, and if a negative number is on the income statement is usually because some information was misclassified. Understanding this can help business owners avoid making decisions based on income statements that have errors in them.
CFO services says that the most powerful aspect of the income statement as a decision-making tool, is in its simplicity. As long as the income statement has one page, entrepreneurs will be able to easily read the information on the page, and were able to understand the information on it. Many entrepreneurs believe that by creating several subcategories can help the statement to be useful because it contains more information, the business owners should avoid that,because the more subcategories there are, the more information is on the report, reducing its effectiveness to easily be reviewed and understood.
By understanding a profit and loss statements, business owners can make better financial decisions in their business, that can help them avoid cash flow problems or grow in their business in ways that have been possible without being able to understand what their finances are currently at.