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Cfo Services | Reviewing Profit And Loss Statement
In order to make informed financial decisions in their business, CFO services says that entrepreneurs need to learn how to read their profit and loss statements in their business. Without understanding this report, businesses are less armed to make financial decisions in their business. 29% of all failed entrepreneurs will cite that running out of money was the reason their business closed, and if business owners are making financial decisions without having all of the facts, this is much easier than they realize.
There are several things that business owners can do in order to help them understand their profit and loss statements, in order to properly arm them when it comes time to make financial decisions in their business. One of the first things that business owners should do, says CFO services, is review a year to date prior to reviewing their previous year profit and loss statement. The reason why business owners should look at comparative income statement is that will be much easier to see trends in their business this way. Entrepreneurs can get very comfortable on their month-to-month statement and then look at their year to date statement in order to get a good idea of where things are. If business owners are only looking at specific months at a time, it’s hard to see trends. By looking at groups of months, business owners can more easily see if the business is trending up, trending down or if there looking at a seasonal period in their business.
Another thing that business owners should understand when it comes to looking at their profit and loss statements, is how asset purchases are going to appear says CFO services. Business owners should understand that asset purchases do not belong on the profit and loss statement. The reason for this, is because they have to be able to match the expenses to the revenue. The business owner has the asset purchase on the profit and loss statement, it will end up making one month look extremely terrible, the month that that purchase was made in. While it actually is going to be amortized over the next 10 years, and not in a single month. Therefore, the asset will not appear on the profit and loss statement.
Entrepreneurs should also understand that the principal portion of the loan payment will not appear on the income statement either. However, the interest of the loan will appear. The principal of the loan should actually appear on the balance sheet says CFO services, and should be reduced on the balance over time as the loan is paid off.
Understanding profit and loss statements, and what will appear on them and what won’t, can help business owners gain an understanding of the overall financial health of their business, and can help guide them towards making financial decisions in their business that will positively impacts them. Without this understanding, business owners are just hoping that the financial decisions that they make will help the business grow, that may not actually be the case.
Profit and loss statements can be very tricky to understand the CFO services, however if business owners don’t take the time to learn that in their business, they may not be able to make the best financial decision they need to make for their business. It will take them much time to learn, and the difference it can make in their business can be extremely significant, and mean the difference between succeeding in business, or running out of money.
When businesses are reviewing their profit and loss statements, they should know the difference between general expenses as well as direct costs says CFO services. General expenses are the expenses that a business owner will incur regardless of how much product business owner is selling, or if they are dealing any services. This generally includes the overhead of their building, their utilities and the costs that will exist regardless of the amount of work that they do. On the other side, direct costs are the costs that a business owner will only incur as a result of producing products or services for their clients. This generally includes labour and supplies. If there is no work, those bills won’t exist.
Entrepreneurs should also understand the difference between gross profit and net income. CFO services says that net income is the profit in the business once all of the bills are paid. Meanwhile gross profit is the entire revenue of the business, without taking into consideration the bills that need to get paid. Those two numbers can vary greatly, which is why it’s very important that they understand them.
When entrepreneurs are looking at their income sheets, they should also understand that it’s important to consider the percentage of their revenue when they are analysing direct costs. CFO services says that this is because direct costs will go up proportionally based on revenue. If a business owner is looking purely at amounts per month, can look like direct costs are out of control, but by looking at the percentage of the direct costs compared to revenue, they will be able to see that as long as the direct costs are going up proportionally with revenue, there is nothing to worry about.
Business owners should also understand that they need to separate their own salary from all other expenses. CFO services says that this is because a business owner should not use their own salary as a way of determining the underlying success of the business. Since the salary that they take it with the business essentially is an efficient tax strategy for the business owner and their family. It shouldn’t be considered part of the business expenses.
By understanding these terms, business owners can start to understand how to read their profit and loss statement, which will help them make much better financial decisions in their business that can help them see business success and avoid financial strain.