Impress your bank manager! How to read your profit & loss account report
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Free PDF Download Reveal one of the most frequent mistake why thousands of small businesses flop - By Mark Gwilliam |
The main components of a profit and loss statement are:
Sales – Constitute the total revenue received from the sale of a good.
Cost of goods sold – These are the costs directly linked to the production of the good.
Gross Profit (Loss) – Results when the cost of goods sold is subtracted from sales revenue. The gross profit represents the profitability that is generated by the sales revenue.
Operating expenses – These are the general and administrative expenses that are incurred in the day-to-day running of your business; some examples are employee salaries, advertising costs, and rent.
Operating Profit – Results when all the operating expenses are subtracted from the gross profit. The operating profit represents the profitability that is generated when the daily operating activities of the business are taken into account.
Other income and expenses – These are earnings or expenses that a business would not normally have in its day-to-day operations. A good example could be rent earned from a property or interest that is paid on long-term debt. The expenses are subtracted from the earnings in this component to arrive at a net figure.
Net profit before taxes – Results when the net figure for other income and expenses is either added or subtracted from the operating profit. Net profit shows how profitable the company is after all the different types of expenses have been deducted, that is, before it pays it’s taxes.
Income taxes – This is the amount of taxes the company is obliged to pay.
Net income (loss) – Results when the income taxes have been subtracted from net profit. If the net income is positive, the company has been profitable over the accounting period. This figure represents the overall profitability of the company when every single cost of the business has been accounted for. The net income is essentially the bottom line and constitutes the amount of money that the company has left at the end of the period.
As a business owner, you should be able to understand how profitable your company is. From the profit and loss statement, you can easily identify which types of costs took the most away from your bottom line and start thinking of ways that you can curb them. The profitability of your company will also be of interest to banks and lenders. A profitable company shows that it is adept at making the most out of borrowed funds and will have less of a problem securing funds in the future. Now that you see how useful it can be to develop your understanding of this type of financial statement, it would definitely be a good idea to do some additional reading up on the subject.
To get a bigger picture of how some of the components of a profit and loss statement can be used in a budget, have a look at my article called “How to Prepare a Budget”.
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Free PDF Download Reveal one of the most frequent mistake why thousands of small businesses flop - By Mark Gwilliam |
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About the Author: Mark Gwilliam RSS for Mark's articles - Visit Mark's website Mark Gwilliam has worked extensively with several blue chip companies in the UK, Europe & Australasia and is an accomplished entrepreneur. He has written several eBooks & eCourses to help fellow entrepreneurs succeed, from the comfort of his home by the beach in beautiful New Zealand. Learn how to attract customers, enhance your customer relationship & propel your business. Claim 2 free gifts from Mark at www.themarketingdude.com & www.mark-gwilliam.com & look out for more special gifts to reward you for taking action! Click here to visit Mark's website. How to get your Bank Manager to sanction your loan application Attract as many motivated prospects as you can handle Identify your target market for the best results 5 tips for clear and effective writing How to run a successful home based business |
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