Cfo Services | Why Are Profit And Loss Statements Important
Understanding profit and loss statements is incredibly important in small business says CFO services, because entrepreneurs need to be able to understand their own business finances, in order to make important business decisions. Being able to stay profitable, reducing expenses early, and knowing the right time to bring on new staff and purchase assets are all examples of why it’s very important for entrepreneurs to understand finances in their business.
Most business owners will have loans at some point in their business, and understanding how those loans are going to show up on their income statements as well as profit and loss statements can help them understand their finances. The first thing to keep in mind, is that asset purchases do not belong on the profit and loss statement of a business. While the interest will appear on profit and loss statement, the principal portion does not. It does however appear on the balance sheet, and reduces and value is the loan balance is paid off over time says CFO services.
It’s also very important to note that entrepreneurs should not have their salary appear on the expenses of the business says CFO services. The reason for this, is because a business owner should not determine how successful business is based on their salary. Even though many business owners believe that since they worked in the business their salary should count as a business expense, the business owner should keep that activity out of the business, and be able to figure out how successful the business is using the employees they have not their own salary.
When reviewing their statements, entrepreneurs should always keep in mind that looking at a comparative statement of six months is always better than looking at each month at a time says CFO services. The reason for this is because errors will be able to be seen more easily by looking at six months at a time, it also will allow business owners to see trends in their business. Are there costs going up, is their revenue in our their sales going up. It’s also very important to have a six-month comparison if the business tends to have certain periods which are more busy than others. Looking at a six-month comparison, business owners can have a quick and powerful comparison tool.
It’s very important for entrepreneurs to know that if they are looking at any interim statements, there is a higher degree of probability that those interim statements will have errors on them. Since interim statements are not likely to be as strictly checked for errors the way year-end statements are, business owners need to keep this in mind, and keep their eyes open for errors when they’re looking at statements throughout the year.
Because of these reasons, business owners will find that reviewing their financial statements can become easier, and not only easier to read, but easier to understand and know what they need to do in order to help them minimize expenses and maximize their profit.
If business owners are able to keep their costs down in business, they can help the business stay profitable says CFO services. One way that they can do this, is by learning how to review their financial statements throughout the year in their business, so that they can affect changes in the moment, which can affect their business positively. Entrepreneurs who only make changes in their business when they see their statements come out after year end, they may lose important opportunities to minimize expenses early on, which can result in a cash crunch in their business.
Looking at an income statement is extremely powerful tool in determining the financial health of their business says CFO services. But the power of this document lies in its simplicity as well. Business owners need to resist the urge to put too many subcategories into this statement. While many people think more information is always better, that’s not the case with these income statements. They should remain fairly simple so that they can be easily read and easily understood. Only then will it be a powerful comparison tool for business owners.
It’s also very important for business owners to understand that their income statement should be categorized very specifically, with the highest expense items appearing at the top of the list, and the less expensive items are at the bottom. Business owners will find that the biggest expenses their business have will be rent and administrative staff, while at the bottom of the list, they’re likely to see bank charges and phone bills. It might be tempting for business owners to want to reduce the expenses in the items that appear on the bottom of the income statement, but they can get higher return on investment simply by reducing the expenses on a few of the items at the very top of the list as that’s where the biggest expenses are.
Since the income statement is dealing mostly with expenses, business owners should understand that there is rarely an occasion where a negative number should appear. CFO services say that a negative number would likely indicate that a business owner had a increase in finances there, which is nine times out of 10 not the case. Business owners should understand that a negative number is usually misclassification on the income statement, and that they can use that as a benchmark to look for other errors, and get them fixed.
By completely understanding their income statements, and how to read them, CFO services say that business owners can use that statement as they are very powerful tool that can help them reduce expenses in their business and stay far more profitable. Be able to do this on a regular basis in their business, can help entrepreneurs stay profitable in their business as they wanted to, instead of waiting until the year end before they think changes in their business.