Profit and Loss Statements and Balance Sheets
Whether you’re running a limited company or working as a sole trader, you can’t get around it; you need to keep track of your finances! So, in this post, we’ll be walking you through the backbone of your accounts; the profit and loss statement and the balance sheet. Getting your head around these accounting tools will help you monitor your business’s financial health and make strategic plans for its future success.
Profit and Loss Statements
In any business, calculating the profit you make is never as simple as subtracting direct costs from the price you charge. To get a true reflection of how much money your company is really making, a comprehensive P&L statement is vital.
A P&L statement will summarise the revenue, costs and expenses incurred during a specific period of time - usually a month or a quarter. By taking into account all kinds of outgoings such as fixed overheads, IT costs, tax and dividends, a P&L statement will reveal a company’s net profit during a fixed time period.
Essential to any business plan, P&L statements are vital as they alert directors to any potential issues and enable them to make informed, wise decisions on how to tackle them. This could include cutting costs, raising prices or eliminating a certain product or service that isn’t performing well.
Whilst a P&L statement subtracts costs from revenues, a balance sheet subtracts liabilities from assets. It provides a valuable snapshot of a company’s financial health by comparing the amount and quality of its assets against any money it owes.
Assets include money in the bank, previously-purchased stock and outstanding money owed by customers. They’re listed in order of liquidity with the most liquid - cash in the bank - listed at the very bottom.
Balance sheets are so vital because, ultimately, profit doesn’t always equal assets. In fact, even a profitable company can be cash poor. They might have significant money tied up in stock and outstanding payments, but find themselves struggling when it comes to paying wages or suppliers. This is why it’s essential that P&L statements and balance sheets are used in tandem.
Both P&L statements and balance sheets can be used to produce KPI data such as gross profit margin, wages as a percent on turnover and debtors day ratios. This valuable financial data gives you a comprehensive reflection of your business’s financial health, helping you make wise decisions and informed plans for its future success.
Making Accounts Simple With Clarity
Still scratching your head when it comes to profit and loss statements and balance sheets? We’re here to help! At Clarity, we ensure that our clients always have the accurate numbers and information they need to make wise decisions for their business. Get in touch today to find out more!