Financial statements are an indispensable part of the accounting and bookkeeping department of any business. It helps you understand your current financial position, assets and liquidity, as well as your overall business’s health. Not only that, but it also is the perfect tool to use for making accurate projections for your company’s future.
Clearly, keeping a record of accurate financial statements is crucial for all Pakistani businesses. The profit & loss statement (P&L) statement in particular is very important. Let us take a deeper look into the insights that a P&L statement provides.
What is a Profit & Loss Statement?
The P&L statement, also simply known as an income statement, is a record of your company’s revenue and expenses over a certain period of time. It comprises two major sections; revenues and expenses.
Revenues show how much money your business brought in for that period, and subtracts the actual cost of producing your product (COGS), in order to give a calculation for gross profit.
The expenditure section takes the gross profit, and subtracts all operating expenses that were incurred during the period. This gives the final value for net profit.
After net profit is calculated, dividends, tax, and retained profits are also calculated and recorded.
What Does Your P&L Statement Tell You?
The profit and loss statement tells you a lot about your business’ profitability, earnings, profit margins, and overall financial health.
In particular, it is useful for making further calculations, such as gross profit margin %, net profit margin %, and more. Such calculations help you determine how effective your business is in producing the product, and how much profit it is actually earning.
Here are some major insights that your P&L statement will give you:
- Are you earning enough revenue to cover the cost of making your product?
- If you have more than one revenue stream, how are they performing against each other?
- Where are you spending most of your money?
- Are there any big expenses that can be reduced or cut out?
- How much profits are actually available in the business to take home, distribute to shareholders, and retain in the business?
- Are you efficiently producing your product?
This financial statement, like all accounting and bookkeeping records, are also incredibly important for business valuation purposes. Investors will be very interested to see your P&L statement, as well as internal stakeholders when making future business plans for growth.
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