A Tool: Profit and Loss Statement
If you are an entrepreneur, you should be very familiar with your business’s profit and loss statement (also known as an income statement). This report summarizes the revenue you have coming in and the expenses you have going out over a given period. It’s important to know if you’re really making or losing money. Too many entrepreneurs try to do these calculations in their head and think they are making money or not making money. However, they are surprised to learn that they are actually losing money when they start creating a regular profit and loss statement.
There are a few other reports that may also be important to your business such as a balance sheet and cash flow statement. However, your profit and loss statement is the most important because it will help you track the following numbers that are critical to your business:
- Net profit margin: the financial ratio used to calculate the business’s percentage profit produced from the total revenue.
- Gross sales: the company’s total sum of sales within the specified time without making deductions such as sales discounts, allowances, and returns.
- Employee costs: Employee costs to a business go beyond just wages. You need to include taxes, benefits, and other expenses to calculate the true total employee cost.
- Cost of Goods: If you sell a physical product this is the cost of acquiring or producing a product to make it available for sale to customers.
I am not asking you to be a CPA. However, the profit and loss statement will give you a true reflection of the business performance and is crucial to understanding whether the business profitable or not making enough money. Knowing these numbers and understanding the percentages for your business make it easier to see problems and opportunities.
You should make it a law in your business to have your profit and loss statement done by the 5th of every month.
“If you aim at nothing you will hit it every time.” — Zig Ziglar