Cfo Services | Why Understanding Profit And Loss Statements Is Necessary
Although many business owners are less comfortable with certain aspects of running their business says CFO services, because they are much better at the products or services that their business sells, and how plus knowledge about how to run their own business. However, it’s important for entrepreneurs to get comfortable in understanding business, in order to help them make the best business decisions that they can. As Warren Buffett, a great investor was famous for saying, “accounting is the language of business.” If business owners are able to learn the language of business, that can go a long way in helping them make the right decisions for their business, that can help them stay profitable as well as avoid cash flow problems in their business.
When business owners are looking at their income statement, there are several things that they should keep in mind says CFO services. The first thing is that the power of an income statement is in the simplicity of it. It may be very tempting for business owners to want to include a lot of information and create a lot of subcategories, but to while this sounds like a good idea actually makes the income statement much more difficult for them to the income statement should be one sheet of paper, and we extremely easy for business owners to look at make decisions on. The more subcategories that a business owner has, can end up being too confusing to be able to read at a glance. Entrepreneurs should avoid trying to over classify their income statement.
When reviewing their income statement, business owners should first look at their balance sheet says CFO services. The most important reason for this, is because there may be obvious errors in their income statement, that become obvious only once looking at the balance sheet first. Since interim statements are not a strictly check for errors, reviewing the balance sheet first should be considered the business owners quality assurance process.
The income statement also is the most powerful when it is organized in numerically descending order says CFO services. This way, the expenses that are the most significant appear on the top half of the list. The least significant items will end up being at the bottom of the list. In order to reduce the expenses in their business effectively, business owners should spend their time reducing the cost of the items that are on the top half of the list, because the have the biggest impact on the business owner’s bottom line. Examples of those costs are for rent and administrative staff. For example, if the business owner is able to eliminate the impact of the administrative staff on their bottom line, it can help make them more profitable. They might do that by asking an admin staff to work on billable jobs, in order to offset the cost of the income statement. The items at the bottom of the list are more likely to be costs such as bank fees and utilities, which are not likely to add up to a lot for cost minimization.
If entrepreneurs don’t know how to effectively review their profit and loss statements, and aren’t able to determine if those statements are reasonable or correct, they may end up making financial decisions that can negatively impact their business says CFO services. It’s extremely important for entrepreneurs to understand their profit and loss statements, not only so they can minimize errors, but so that they can make great financial decisions that will positively impact their business. They can only do that by understanding how to read their profit and loss statements in their business.
When business owners are reviewing their income statement, they should understand that their principal portion of the loan payment will not appear on their income statement says CFO services. Although it’s a payment that needs to happen, many entrepreneurs get confused as to the principal not showing up on the income statement. However, it’s important for business owners to also understand that the interest that loan will appear on their profit and loss statement. Although the principal will show up on the income statement, it will show up on their balance sheet will be reduced on the balance sheet as the entrepreneur pays back the loan.
Also, asset purchases will not appear on their profit and loss statement either says CFO services. While it may make sense for business owner to include the asset on their profit and loss statement, since it’s actually going to be utilized in the business for several years, it should amortize in the business over the next several years instead of giving the business a huge hit in the month that it was purchased. By doing that, it will make month look like it was extremely terrible and profit, one that might not have been the case. Since assets are going to benefit the business for several years this should be reflected on the profit and loss statement.
Something else that business owners should take into consideration when they are reviewing the expenses of the business, is that their own salary does not count towards the expense of the business. CFO services says that this is because the business owners salary should not be a way of determining the underlying success of the business. Since salary that they take home is essentially attack strategy for the business owner, this does not belong as a business expense.
There are several things that business owners need to take into consideration when there reviewing their profit and loss statements, in order to help determine how profitable the businesses, and whether it’s becoming more successful, the successful or staying the same. This can help business owners ensure that they can make the right decisions throughout their fiscal year in order to help the business become profitable many financial business decisions should not wait until the businesses financial year end statements to come back in order to make decisions. The sooner a business owner can ensure their business stays profitable, the more positive impact has on the business.