Accounting Tips For You

Profit and Loss Statements As Planning Tools

It is very important for any business owner or investors in companies to have a working knowledge of how a profit and loss statement is structured and generated. In this article these issues are clarified and explained.�

The new businessman and investor normally do not have a lot of in depth knowledge of financial statements, thereby increasing their risk of failure significantly. �To be really successful when starting a business or becoming serious about investing this needs to change.�A comprehensive understanding of how a profit and loss statement is constructed will become one of the primary tools when interpreting it.

The profit and loss statement, also sometimes referred to as the P&L statement or the income statement is basically used to reflect all the income sources as well as all the expenses for the given period. �In other words it lists the revenues and expenses, and reveals the profit or loss of the business for the reporting period.

Most business people and investors have probably seen a formal income statement for a business or have paid an accountant to prepare one. �To create an income statement for a small business is not difficult.�There are a number on spreadsheet templates available for this purpose that can be used as a basis. �It is recommended that such a template be used as a basis and adapted to suit individual needs.

Constructing a Basic Income Statement

Before attempting to interpret an income statement it would prudent to understand the construction and composition in detail.�It is a good idea to utilize a spreadsheet template as a basis as it can be adopted easily.�After entering the income and expense amounts the spreadsheet template could automatically calculate all the subtotals and totals ready for you to calculate ratios and interpret them.

The first step in constructing the income statement is to record the net revenue.�The net sales or revenue are the gross revenues generated from the sale of products less any returns or credits given for cancellation of order and allowances such as the reduction in price for discounts passed on to customers.�This is done by noting the gross sales and deducting from that all sales returns, discounts and allowance to arrive at the net sales.�

The next step is to determine the cost of goods sold. �This is the direct cost associated with manufacturing of the inventory items.�It includes all raw materials used, the direct production labor, the salaries of the production manager and all production supervisors, freight charges and all other costs associated with operating the plant that produces the items the company sells. �In order calculate this value, the value of the opening or starting inventory needs to be determined.�Then add to this the value of items such as purchases of raw materials, the cost of freight to get production materials to the production facility, direct production labor and other indirect expenses associated with the production of the sold goods.�This will provide you with the value of the available inventory for the reporting period.�Now deduct from this the value of the closing inventory to arrive at the cost of goods sold.

The standard layout of a Profit and loss statement then requires the determination of the gross profit or loss.�This is simply done by deducting the cost of sales from the net sales value. The gross profit corresponds to the amount of direct profit associated with the actual manufacturing of the products.

The next step is to consider other expenses, sometimes also referred to as overheads.�This includes costs associated with items such as (in alphabetical order):

��������� Advertising

��������� Amortization

��������� Bad Debts

��������� Bank Charges

��������� Charitable Contributions

��������� Commissions

��������� Contract Labor

��������� Depreciation

��������� Dues and Subscriptions

��������� Employee Benefit Programs

��������� Insurance

��������� Interest

��������� Legal and Professional Fees

��������� Licenses and Fees

��������� Miscellaneous

��������� Office Expense

��������� Payroll Taxes

��������� Postage

��������� Rent

��������� Repairs and Maintenance

��������� Supplies

��������� Telephone

��������� Travel

��������� Vehicle Expenses

��������� Wages

Adding all this type of costs together and deducting it from the Gross profit provides you with the net earnings before interest and tax, sometimes referred to NEBIT.�In some companies any special items are first accounted for before the NEBIT is calculated.

Using the Income Statement as a Planning Instrument

As can be seen from the above, the profit and loss statement of a company can be used as an important financial management planning instrument. �When using it as a planning instrument the statement is constructed using the expected periodic monthly and/or annual income and expenditure.�This calculation should be based on realistic forecasts and estimates of sales, expenses and overheads.�The forecasts and estimates are normally a reflection of the objectives and targets contained in the strategic plan of the company.

The planning department will record the agreed upon estimate values on the forecast profit and loss statement of the company. �As actual operating results become available the financial department will record these on the profit and loss statement. �It is the duty of the line managers to compare these two statements to detect difference between the estimated and operational numbers, and to implement appropriate remedial measures to rectify any significant deviations that could result in the company not achieving its financial goals.

Conclusion

A wide variety of benefits can be derived from an efficient and efficient financial planning process. �A company that utilizes the income statement as a financial planning instrument is clearly concerned about the profit of the company.�Using this instrument helps to eliminate unnecessary expenditure and sets the stage for an improved monitoring regime of cash flows. �It is also evident that companies utilizing the P&L statement for planning purposes are able to maintain a better balance between their income and expenditure. �Another benefit is that these companies are capable of maximize their return on investment (ROI) through the use of this planning tool. �

It is strongly recommended to assess the financial planning tools a company utilizes before considering to invest in it.�Companies not utilizing their profit and loss statements as a planning tool should be very carefully scrutinized before investing in them.�

� Carl Marx 2009

Dr. Carl Marx completed his Doctorate in Business Administration (DBA). He was awarded the best financial student award at the completion of his MBA. He has extensive experience in providing multi cultural clients with business solutions.

He is widely published in the printed and electronic media in fields as diverse as Financial Management, Risk Management, Safety Management and the Law.

Dr Marx have extensive experience in providing successful solutions to clients in more than 14 Countries, including China, Indonesia, Malaysia, Papa new Guinea, Australia, South Africa, Uganda, Ghana, Saudi Arabia, Brazil, Mexico the US and the UK.

You are welcome to contact Dr. Marx at drcmarx@gmail.com for any help or support needed.

Additional information and resources can be found at http://financialsupport.weebly.com