As part of OnlineAdvisor’s efforts to educate, inform and encourage business leaders, we present key financial terms and concepts. Understanding the benefits of an income statement is important for the executive.
An income statement, as we’ve covered before, shows the company’s performance over a period of time. Usually we print out an income statement either during the month, or after a month has ended.
Profit and Loss
For our business, we call this statement a “profit and loss” statement. Through the rest of this sheet, we’ll use the abbreviation “P&L” to describe this statement.
As managers, executives or owners, the profit and loss statement is a very important tool. It allows us to monitor how we are earning money and how we are spending money. It shows us specific categories and line items that we need to watch to ensure that we don’t get in trouble.
Payroll in the P&L
Let’s discuss a very important line item on a P&L: the payroll line.
For most companies, the biggest expense is made when we pay people to work for us, commonly called “Payroll” on a P&L. If we don’t have people working for us, we may not stay in business – so it’s a necessary expense. However, it can be an expense that can get out of control.
If we hire and pay more people than what we should, it can cause our business to go broke. If we allow our employees to work overtime here in the United States, it can create higher payroll expenses. It also causes us to get into financial trouble. On the other side, if we don’t have enough people working for us, it may save us money. It also creates the potential for sales to decrease to dangerous levels. This is why we watch line items on the P&L, both separately and together to see what effects they have on each other.
For many companies, there are specific areas to monitor that are generally common for everyone. Categories such as “Cost of Goods Sold”, gross profit, and net profit are areas which successful companies monitor them constantly. We’ll cover these and other important ones in our financial report classes.
The P&L also is a good tool to have important line items for our companies to monitor. We need to understand what areas we need to monitor performance and to put those line items in the P&L to watch them. They can be specialized sales channels, unique manufacturing costs, or, maybe even outsourcing costs.
The Importance of the P&L
If you’re making a list of reports you want to use on a monthly basis, the P&L is one of them. This can be your trusted friend, depending on how you want to manage your business. If you use this report on a regular basis and then make wise decisions on what it tells you, it can be a great friend. If you ignore the P&L report, however, the information that it provides will be missed – making your management requirements a whole lot harder to complete.