A profit and loss statement is a document that businesses prepare to measure their expenses and revenue in a specific period. It shows a company’s financial status and progress during a plotted period. The statement shows how a company can make a profit by increasing revenue and reducing costs or by combining the two. It provides details of different revenues and expenses such as net sales, sales expenses, gross and margin profits.
Here are the advantages of preparing a profit and loss statement.
1. Helps to measure net income
The main advantage of preparing profit and loss statements is to help the company know their net income during a specific period. You can use results to determine if the sales method you were using worked effectively. Low sales will affect the company’s net income.
2. Helps you to make wise decisions
When you prepare a profit and loss statement, it will help you know your company’s performance during a specific period. When you know your company’s performance, you will make wise financial decisions to increase profit. You would make informed decisions on investing your company’s money that would have resulted in losses if you did not prepare a profit and loss statement.
3. Have proof of your business’s achievements
When you prepare your profit and loss statement, you can provide a record of how your business has been performing at a certain duration. You can use this information to prove to your business investors the company is succeeding, and they should continue investing in your business. Investors will use the profit and loss statement to determine if the company makes profits and if there will be future returns from their investments.
You can also use the profit and loss statement to prove to your buyers that the business is worth their money if you are selling. You can use the profit and loss statement as a measure of trust with you as your new business partners may request it to know how the business is performing.
4. Helps you to prepare to file tax
Preparing your profit and loss statement and other business documents regularly help you to have all the information you require you to file the tax returns when you need. Updating your profit and loss statements helps you update your accounting software.
5. Helps your business get loans
Profit and loss statements show a company’s ability to create income. Sometimes your business might need financial help to fund its operations. Most banks give loans to smaller businesses based on their financial performances in the past years. They ensure they give the right loan amount which it can repay. A good profit and loss statement history is important to help your company get the best loan terms.
Preparing your company’s profit and loss statement is very important. It helps you know if your company’s progress. You can use profit and loss statements to make wise decisions. You also use it to get more investors in your company if it has good performance.