Profit & Loss Budgets vs. Profit & Loss Statements
Understanding unique financial reports and what they contribute to financial planning better enables business owners to manage opportunities and risk. Profit & loss budgets and profit & loss statements are commonly confused terms. Read on to learn the difference and to better understand how Profit & Loss budgets and statements can benefit your business.
What is a profit & loss budget?
- A forward-looking budget forecast that provides the basis for determining revenue and expenses of a company for the upcoming year
- Sets revenue targets that will enable the company to support forecasted expenses
What is a profit & loss statement?
- A summary of a company’s revenues and expenses
Also referred to as an income statement, statement of financial performance, earnings statement and revenue statement
- Demonstrates how revenue (monetary amount prior to the subtraction of expenses) results in net income (the leftover revenue once all expenses have been subtracted)
- This statement shows the financial operations of a company for a designated period of time
- Both the budget and statement measure revenue streams and expenses
- Each captures a company’s profitability on loss
- A profit & loss budget is a prediction based on past performance and anticipated action steps
- A profit & loss statement is a summary of actual results
- They both contribute to a business owner’s understanding of and control over the financial wellbeing of their company
- Creation of the report and financial plan:
- A profit & loss budget is forward-facing and therefore, relies on estimated costs and revenues to project a potential net income
- An income statement looks back over a period of time, evaluating realized expenses and revenues to determine earnings on an actual basis
- Relevancy to stakeholders:
- Investors, government agencies and other stakeholders are interested in income statements because they need to know whether or not a company is profitable
- Profit & loss statements demonstrate the risk of investing in a company
- Income statements determine how much tax a company will pay
- Internal parties use profit & loss budgets to set sales goals and expense budgets that will allow them to meet net earnings targets
- Budgets will also be leveraged when applying for a bank loan to demonstrate repayment capacity to creditors
Generate more profit with Hogg, Shain & Scheck and CCH Profit Driver
At Hogg, Shain & Scheck, we believe that a company’s financial statements and reports should be used as management tools. Operational improvements that will increase profit margins should be discussed constantly, not just at year-end. CCH Profit Driver enables you to better understand your organizational structure and how it has affected your profit margins. We use the comprehensive picture of your financial history to create a forward-looking plan that will enhance operational efficiency and improve profitability.
Profit & loss budgets and income statements are just two of the many financial reporting and planning tools that entrepreneurs have at their disposal. Protect your company’s profit margins by being well aware of your earning trends. If you are ill-at-ease with leveraging financial planning tools, contact Hogg, Shain & Scheck for a consultation to ensure that your company is, and will remain, financially healthy.