Cfo Services | Why Review Big Profit And Loss Statements Is Important
Making important decisions financially in their business throughout the year is vital to the success of business says CFO services. Not only do business owners need to make big financial decisions such as when to purchase equipment, went to hire a new staff or if they need to lay off staff. But it’s also very important for entrepreneurs to know what they need to look for in order to help keep their business profitable, to stay on top of rising expenses, and see if there’s anything that they can do throughout the year to help the business be more profitable instead of waiting for their year end to make those decisions. Since 50% of all entrepreneurs close their business within five years, and 29% of them say that running out of money was the reason why their business failed, helping business owners be financially responsible throughout the year can go a long way to helping them succeed in business.
When determining if their business is profitable or not, one of the first things that business owners should do says CFO services, is understand how to organize their income statement. It’s important that a business owner’s income statement is a numerically defending order, in order to see that the most significant costs are at the top of the list. If a business owner wants to impact their business greatly, they should spend more time minimizing the costs on the top of the list rather than at the bottom.
CFO services says that it’s also very important that business owners understand that they should not have too many subcategories on their income statement. While they might believe that it’s helpful to have a lot more information, having too many subcategories can be extremely difficult for a business owner to read, therefore it becomes less of a powerful decision-making tool that it could be. Entrepreneurs will always have the ability to run subcategories on their income statement when needed, but generally speaking, their income statement should be one sheets and have all of the information listed very simply.
It’s also important that business owners understand what their gross profit is versus what their net income is. CFO services says that gross profit is the revenue that is been brought into the business entirely, that is not taking bills into consideration. While the net income, is the prophet of the business once all of the bills have been paid. This is important for entrepreneurs to know, because they may get one idea of the financial health of their business if they are looking at the gross profit, which doesn’t necessarily accurately reflect how much money they actually have to utilize in their business.
When entrepreneurs can understand what going on financially in their business, they will be able to make great financial business decisions throughout the year that can help their business stay profitable, and thrive. Business owners should not wait until their year-end statements in order to start making impactful financial decisions in their business.
There’s many reasons why a business owner should be concerned with the financial health of their business says CFO services, not only do entrepreneurs have to make large financial decisions in their business throughout the year, they also need to be able to help the business stay profitable and minimize expenses. It’s important for business owner to be able to review their business finances throughout the year in order to help make decisions that can help the business grow.
Entrepreneurs should understand that when looking at their profit and loss statements, they should separate their own salary from all other expenses says CFO services. What the business owner takes out of the business should not be an indication of the underlying success of the business. Ultimately the salary of the entrepreneur is a tax decision based on strategizing for the business owner and their family.
It’s also important to note that asset purchases should not belong on the profit and loss statement and will show up there says CFO services. The reason for that, is because the asset purchase will actually opportunities in the business for the next several years. CFO services says that it is not a true collection of profits or losses in the business for one month to take a huge hit in the month that an asset was purchased in the business. If that is the case, it would end up looking like that month had a huge deficit, making the month extremely unprofitable, even though that may not of been the case at all.
Many entrepreneurs believe that the principle of their loan payment should appear on their income statement, however CFO services says that this is not the case. A business owner needs to understand that while they must make that loan payment, it’s not going to show on the income statement. However, the interest will appear on their profit and loss statement, understanding how this works, an entrepreneur can be prepared to make that loan payment despite it not showing up on the income statement, and that the principal will be listed on the balance sheet, but the will be reduced on the balance sheet over time as the business owner pays off debt load.
It’s also important for entrepreneurs to know that when they are viewing their comparative monthly income statement, that they should be looking at the reports as a six-month comparative balance sheet. CFO services says that would business owners look at the balance sheet as a month-to-month statement, it’s harder to see what trends are happening in the business, as well as if there are any errors. Looking at the business in six-month locks, can help a business owner see if the business is trending up, trending down, or if there are any errors.
Helping business owners understand how to read their income statements and profit and loss statements, they will be better able to completely understand what’s going on in their business and make appropriate decisions based on that information.