Cfo Services | The Importance Of Understanding Profit And Loss Statements
Entrepreneurs often need to make important financial decisions based on the profit and loss statements in their business says CFO services. However, if they do not know how to read those statements, they won’t be able to make the best financial decision for their business. As Warren Buffett was quoted as saying, “accounting is the language of business”. Helping business owners understand how to read their financial statements can help teach them how to speak and understand the language of the business and it will go far in helping them make the right financial decisions and their own business.
When reading their profit and loss statements, business owners should understand that a negative number on their income statement can often indicate a mistake says CFO services. While most entrepreneurs believe that a negative number on their income statement means that there was a negative amount provided, but because the income statement usually deals with what was received in the business, is less likely that there is anything negative that was received into the business so entrepreneurs should understand that at least 90% of the time, a negative number on the income statement indicates a mistake. Usually it is a misclassification. That’s a good indication when they’re reviewing the income statement, what to look for in order to determine if this statement is incorrect.
It’s also important that entrepreneurs should understand that when they are looking at their business expenses, that the owners salary should not be included in that report. The reason for this is because entrepreneurs should not use the owner salary is a way of determining the underlying success of the business. What the business owner takes home is a tax decision for the owner and their owners family says CFO services, that should be kept out of the business expenses and separate from the activity of the business. Business owners should understand that they really should run to different reports, what the business did before the owner took their salary, and what the business did afterwards.
Another important realization when looking at profit and loss statements, is that asset purchases do not belong on the profit and loss statement. The reason for this is because an asset will actually amortize over the next several years, usually 10 says CFO services. If it is listed on the profit and loss statement, then it will show is getting the month that the asset which is purchased in a huge hit, when that’s not necessarily reflective of the business that was done that month.
Another thing to keep in mind when looking at profit and loss statements, is that the principal portion of the loan should not appear on the income statement, however CFO services says the interest does appear on the profit and loss statement. The principal should actually appear on the balance sheet and it should reduce the balance of the loan over time, as the business owner pays that loan down.
By understanding how to read profit and loss statements, business owners will be able to better understand financial situation their business is in, and make the appropriate financial decisions that they need to make.
Often in business, entrepreneurs need to make large financial decisions throughout the year, that cannot wait for their fiscal year end to happen and then six months later getting their year-end statements says CFO services. As a result, it can be very helpful for business owners to understand their business financial reports, so that they can review them anytime they need and make important financial business decisions. By making these decisions without first understanding their financial reports, means that any business owners are making incorrect decisions about their business that could end up causing a lot of financial harm.
When business owners are reviewing their finances, they should keep in mind that doing a six-month comparison should be more preferred over reviewing one month at a time. CFO services says that business owners will be able to see trends a lot more easily. This is especially important if the business is seasonal, or if they had any bizarre one-time occurrences that happened in one month and whether months. When looking at the months one at a time, business owners will have a harder time seeing these trends or anomalies. For quick and powerful comparison, a business owner should look at their profit and loss statement six months of time.
When they’re reviewing their income statement, business owners should know that they should be looking at it with as few accounts as possible. CFO services says that business owners are often tempted to try and put too much information in, because they think the more information they provide the more comprehensive the report will be, but it’s the power of the income statement is that it should be on one sheet and be very easy to read. There’s more than one page or more subcategories, it can be difficult to read and more difficult to determine the financial health of the business.
When it comes to the income statement, business owners should also be arranging it in numerically descending order. CFO services says that it may be tempting for business owner to want to run a of medical report, but numerically descending order will allow the business owner to see what the highest expenses in the business is because they will appear at the top of the page. Often the top to expenses or at least close to the top of the list would be the building rent and administrative staff. If business owners want to effect the greatest financial change in their business, they should work on reducing the costs that are at the top of the list is that will give them the greatest return on investment of their time.
When entrepreneurs can understand all of the various financial statements that they can pull in their business, it will help them make better financial decisions in their business, that can help them grow and succeed in their business.