Why Does Your Company Need a Profit and Loss Statement?
The Profit and Loss Statement, otherwise called the P&L Statement or Income Statement, is one of the most crucial reports any company or business entity has to prepare. The P&L Statement is a necessity for any company due to a variety of reasons.
First of all, the company needs a P&L Statement to enable the owner and/or the management to assess the financial health of the company. Through an analysis of the P&L Statement, the owner will be able to see if the company is earning the revenues the owner expects it to earn, whether it is gaining any gross profit (revenues less cost of goods sold) from selling its goods and whether it is earning enough profit to cover the expenses it incurs for its general operations. Through the statement, the owner will also be able to ascertain where exactly his money was spent and where the company’s money actually came from (aside from the owner’s capital that is). Most importantly, through the P&L Statement, the owner will be able to calculate how much he earned from the capital he placed in the business and how much he still expects to earn in the future.
If the company’s operations is not doing so well or if the owner is having trouble with the business’ cash level, the owner can turn to his P&L Statement in order to assess in which areas his business is actually losing. Is the company getting a good margin from selling its goods? Is the company earning enough net profit to cover its operating costs and/or interest expense? Is the company spending too much in advertising, marketing or any other expenses? Is there a need for the company to reduce the number of its employees to save on salary costs? Does the company need to obtain a new loan to finance its operations or to meet its cash requirements in the future? All these questions (and even more) may be answered through careful analysis of the P&L Statement.
In addition, if the company needs to obtain fresh capital or new loans or to renew current loans, it also needs a P&L Statement to show to any potential investors or to its creditors, current and potential. The potential investors and creditors will look at this statement to verify if the company has been profitable in the past and to project its future profitability or performance. The P&L Statement will also aid the company in convincing its potential investors and creditors that it has the ability to gain new profits from the fresh capital or to repay its new or current loans.
Lastly, the company needs a P&L statement to calculate how much taxes it needs to pay the government and to support such an amount accordingly. The government’s tax collection agency requires such statement to ensure that the company or its owner is paying the right amount of taxes. Through the P&L Statement, the company will also be able to estimate how much taxes it will need to pay in the future and to allocate such an amount accordingly.