When
you peruse your accounts, do you know what you are looking at in your profit
and loss report (P&L) and in your balance sheet? This is something that is
important for every entrepreneur to understand. Even if you leave dealing with
the detail of the finance side of your business to others, these two reports
will help you to keep tabs on your performance and to know when to put the
brakes on and when to surge forward.
What they Represent
The
main difference between them is that the balance sheet gives a snapshot of
where you are at time the report is produced, while the P&L covers
transactions over a period of time. So if you want a measure of the company’s
financial health, you look at the balance sheet, while if you want to know how
profitable you’ve been over the last quarter, you turn to the P&L for that
period.
Why you Need them
Both
Your
outsourced bookkeepers will tell
you that the reports need to be viewed together to get the big picture, because
you could still be in trouble even if you have made good profits recently. It
depends on what else has been going on.
You
may, for example, have decided on an area of growth that needed a large initial
investment in stock or materials. Your liabilities could exceed your assets. If
you don’t make as much profit in the next period, where will the cash for the payments
due come from? Keeping tabs on the big picture will stop you falling into traps
like this. Most accounting systems will produce a P&L with comparable
figures from the previous period, so you may be able to identify trends and
potential opportunities or pitfalls.
If
you are seeking finance, possible lenders will also want to examine these
reports. They will think twice about lending to or investing in your business
if you can’t show consistent profitability and sensible decisions in response
to the figures. With an up to date balance sheet and a periodic P&L, you
can see whether it’s a wise time to apply for funding. When you see that the
time is right, you’ll have no problem giving potential lenders confirmation of
your liquidity.
Regular Monitoring
When
your accounts have been brought up to date by your bookkeepers, they can produce the
reports swiftly from your accounting software by entering the period or date
and clicking run. It’s a good idea to schedule this activity at regular
intervals and sit down together with your bookkeepers
to discuss the implications of the results.
