What is a profit & loss statement?
- A record of a company’s revenues and expenses within a specific period of time
- These statements demonstrate whether or not a company is generating a profit or loss
- If a company is losing money, they identify how much and where revenue is being generated and what cost structures need to be adjusted to restore gross profit margins or operating expenses
What do they do for your business?
- Demonstrate your financial health
- Articulates how much money is coming into an enterprise, as well as where this money is being spent
- Enhances tax-planning strategies
- Anticipate what corporate and personal taxes you will need to pay
- Make necessary adjustments to reduce your taxation payouts
- Enables business owners to make well-informed decisions
- Highlights trends that affect gross profit margins
- Identifies potential risks
How often should you generate profit & loss statements?
Profit and loss statements show business owners whether or not their enterprises are profiting or losing money. These statements are all about understanding the big picture of a business. So, the farther you are removed from your finances, the more often you should create profit and loss statements.
If you are a sole proprietor or the CEO of a small enterprise, you may be intimately involved with your company’s day-to-day finances. This may mean that you are constantly aware of whether or not you are generating sufficient profits, so monthly or quarterly profit/loss statements may suffice.
If the nature of your role or your business prevents you from closely monitoring your profit and loss, then weekly and bi-weekly reports may be necessary. If your business’ profit margins are constantly changing and your sustainability depends on a delicate balance, generate profit/loss statements as frequently as possible to avoid the rude awakening of ending up in the red.
What internal factors may affect the frequency which with you produce profit and loss statements?
- The length of time that you have been in business
- More established companies will likely have more predictable profit margins
- Newer companies may have less control over their expenses
- If your company is less-established create profit/loss statements frequently until your enterprise is stable
- The size of your enterprise may dictate when you need to produce profit and loss statements
What about external factors?
- External changes that affect the health of your business should encourage you to produce more frequent profit/loss statements:
- Changes in supply and demand
- Market trends
- Government policies
- External parties (e.g. banks, donors, lenders & shareholders) often dictate when profit/loss statements are generated
- These stakeholders may demand statements more frequently than business owners feel is necessary
- However profit and loss statements reassure stakeholders, preventing censures and optimize your opportunities for financial backing
Financial statements may help protect the integrity and sustainability of your business. Address the unique demands of your enterprise by creating a well-informed accounting strategy that dictates how often you will report on the financial health of your company.
Don’t blindly lead your company into an insurmountable deficit. Know when to create profit & loss statements and how to use them to remain financially stable. If you are uncertain regarding accounting best practices, leverage the help of seasoned accounting professionals who serve Canadian entrepreneurs. Contact Hogg, Shain & Scheck for accounting advice and financial audit information.