Understanding Your Profit & Loss and Balance Sheet Statements

As a business owner it’s crucial that you keep track of your finances. You don’t need to be an expert on all the reporting if you have a bookkeeper who assists you, but you do need to keep an eye on two key reports to know that you have control of your company’s financial health.

These two very important reports are the profit and loss statement and the balance sheet, both involve a company’s finances, but their differences are significant

What is a profit and loss statement?

 A profit and loss statement is generally called the P&L, but is also known as the income statement or statement of earnings for a business. It is a detailed breakdown of your company’s sales (money coming into the company as income) and your expenses (direct costs, overheads, expenditure and other costs).

It tells you how much profit you’re making, or how much you’re losing and helps to work out the net profit, which is the money left over after expenses are paid. The net profit is calculated by subtracting expenses from sales. Businesses usually complete a profit and loss statement every month, quarter or year. Monthly being the preferred option to enable you to monitor the money in and out more often.

Monitoring your P&L carefully allows you to track your income and expenses over a certain period of time. Having this regular reporting enables you to look back over a period and discover exactly where you’re making money, and where you’re losing money. The more income you bring in, and the less money you lose, then the higher your profits will be at the end of the financial year. Your P&L is your indicator for measuring these figures.

The P&L statement is good for:

• Seeing a detailed breakdown of all income and relevant expenses
• Viewing the profit and loss amounts over a set period of time
• Summarizing your profit and loss for the period to determine if you’re profitable.

What is a balance sheet statement?

 A balance sheet keeps you up-to-date on your business Assets (what the company owns, including cash) and Liabilities (what the company owes other people) at a given point in time, based on the following accounting equation: ‘Equity = Assets – Liabilities’.

The Equity is retained earnings plus the funds you originally invested as shareholders.

A balance sheet can also help you to work out your:

• working capital – money needed to fund day-to-day operations
• business liquidity – how quickly you could pay your current debts

In contrast to the P&L – which details the revenues and expenditure over a given period, the balance sheet is seen as a ‘snapshot’ of your present finances. In short, it details what the company is worth on paper currently, based on the recent numbers in your accounts.

The balance sheet is helpful for:

• Assessing the company’s current financial position
• Offering proof of your financial position to lenders, investors and banks
• Providing potential buyers an idea of the company’s actual net asset value, if you were to sell up.

If you don’t know your equity from your assets, don’t stress! Accounting can be complex, and it takes a while to fully understand all of the different processes and terms.

So if you’d like to learn more about the basics of your business’ finances, we can assist. Our friendly team are more than happy to run you through your latest accounts and explain exactly what each report represents – and how it details the current performance as a business.

Feel free to contact our tax champions to find out more (03) 8393 1000.