Profit and Loss for Beginners
Overseeing the financials of your small business is a lot like managing your personal funds, but there are additional components accounting departments handle, namely reporting. There are three different types of financial statements you or your accountant should be producing and evaluating on a regular basis. These include:
- Profit and Loss
- Balance Sheet
- Cash Flow Statement
Each one gives a slightly different view of the financial health of your company. The profit and loss statement indicates whether your company gained or lost money in any given period. It’s usually tabulated on a monthly basis, but you should also be evaluating it on a quarterly and annual basis. Sometimes, accountants will refer to the profit and loss statement as a P&L for short. Other names include: statement of income, income statement, earnings statement, financial results statement or operations statement.
The P&L differentiates itself from a balance sheet because the balance sheet includes things like assets and liabilities as well as capital. It’s not purely related to whether you made money or not. It’s also different from a cash flow statement because that relates to inflows and outflows. You may have an inflow when you put your own cash into the company or get a loan, and you may have an outflow when you purchase equipment, so it also will not determine profitability like a P&L will.
P&L: Revenue-Expenses = Profit
The formula for determining profitability is simple: you subtract all expenses for a period from the revenue you generated. For example, if you’re a trucker who runs your own company, and you get paid $4,000 in a month from your clients, you may consider your only expense to be $1,000 in fuel.
If this was the case, your formula would be $4,000-$1,000= $3,000. Your profit would be $3,000 per month. However, if you’re a trucker, you know there are other expenses you’re paying, and you may even have additional revenue sources, which changes your profitability considerably. If you’re in the trucking industry, you’ll likely be dealing with some or all the following:
- Shipper/Broker Payments
- Truck Costs (lease or purchase)
- Maintenance and Tires
- Insurance, Licensing, and Permits
- Load Finding
- Lodging and Food
- Administrative Tasks
- Depreciation of Equipment
Your Profit and Loss Statement has Many Uses
Naturally, your P&L will help you identify whether you’re making or losing money and how much. You’ll also use it when you pay taxes, and lenders will want to see yours if you’re trying to get funding. Depending on your industry, you may use it to determine the cost of goods sold (COGS).
It’s helpful if you want to run an analysis, too. For example, you can use yours to identify seasonal shifts, which will enable you to plan for slower parts of the year, or to pinpoint expenses that are hurting your profitability.
Factoring Can Make Calculating Your P&L Easier and Increase Cash Flow
Invoice factoring is a method used to manage payments made to your business, particularly if you send out invoices to your clients after you’ve completed work or delivered goods. When you work with an invoice factoring company, that company purchases some or all your invoices and pays you right away, then collects payments from your customers.
Easier P&Ls: When you work with a company like Interstate Capital, you have access to powerful reporting tools around the clock, so it’s easy to see what payments have come in. You can also view your collections-related expenses quickly, which makes putting together a P&L much quicker.
Increased Cash Flow: When money comes into your business faster, you can put that money to work. For example, a trucker might normally wait 90 days or more for payment. When a factoring company offers the money faster, that trucker can use the cash right away to get more loads and pay for fuel, so he or she is maximizing time on the road. In many cases, it can reduce collections expenses and accounting expenses, too.
Work with Interstate Capital
Invoice factoring is a great option for small businesses that can’t afford to wait for payments. It’s usually much easier to qualify for than loans and lines of credit, which makes it a viable solution with numerous benefits for lots of growing companies. If it sounds like it might be the right solution for you, download our free factoring guide to learn more.