What is a Profit and Loss Statement?
A profit and loss statement succinctly categorizes revenues, cost of goods, expenses, and taxes on a monthly, quarterly or annual basis. There are numerous uses for this statement.
Why are Profit and Loss Statements Important?
There are numerous reasons why a profit and loss statement is important for finance students to understand. Further, it is even more important for business owners to fully comprehend a profit and loss statement. Listed below are just a few of the reasons:
Profit and Loss Statements help Project Revenues
Profit and loss statements are often used to project sales or revenues for the next quarter or year. By having a well-designed profit and loss statement, business owners are able to plug-in sales growth numbers and determine whether the firm will be profitable or not. From this, not only should business owners understand the profit and loss statement but they should also be able to create a profit and loss statement in Excel.
Break Even Points are Easy in Profit and Loss Templates.
A critical question that business owners often need to know is and what point will their company become profitable. In using a well-structured profit and loss template, a business owner can manipulate the sales growth until profits or broken even. With this identified, strategies are able to be instituted to ensure that sales exceed this point.
Some business owners are often obsessed with sales growth and projections. However, profit and loss statements are also critical for cost control. In a well-structured profit and loss statement, business owners are able to identify individual cost related to the business. Further, trends are able to be identified as to whether cost are increasing or decreasing at an unusual rate. From this finding, business owners are able to take steps to make sure that costs stay in line with sales projections.
Finally, Profits and Losses
The final reason understanding and profit and loss statement is to be able to actually understand how your company will be able to be profitable or to avoid a loss. For example, a manager or business owner can quickly look at the bottom line and determine whether their current operation is profitable. Its operation is profitable, then fantastic. If the company is running at a loss, then the manager or business owner quickly knows that they need to take action to mitigate this problem.
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