The profit and loss account provides information about an enterprise’s income and expenses which results in net profit or a net loss. It helps a businessman to evaluate the performance of an enterprise and provides a basis for forecasting future performance. The profit and loss account describes different activities such as revenues and expenses.
A profit and loss account is not only the statement of income and expense, but it also enables you to increase your earnings.
An established SME can make projections for its future revenue based on its past sales and expected income using their Profit & Loss Account. As a small business starts and grows, it may find it’s expenses increase at a higher rate.
The Profit and Loss Account also allows enterprises to see where it can improve its revenue streams and cut costs.
A small business that only has a few sources of income or expenses will have a short p&L, while a large business with multiple income streams will have a longer one.
Investors can look at your P&L statements from multiple time periods to see how profitable your business is over time. They can also glean information from it on the efficiency of your operations, your competitiveness and the soundness of your business model.
If you make a profit, great! You can re-invest it, save it or make a variety of many other decisions like:
You can hire new employees
You can afford to move to a bigger office
You can plan your taxes
You can plan your current growth strategy effectively
Did we meet our targets? How much did we make last year? All these, and many other questions and business decisions of management require managers to analyze the profit and loss account.