The Importance of a Profit and Loss Statement

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Profit and Loss Statements

Today’s post is about the importance of a Profit and Loss Statement, or as some people call it, a P&L. First, let’s start with the definition a Profit and Loss Statement: A P&L is a financial summary of your revenues, your costs, and expenses over time.

Below, I’ve listed the four key components of a basic P&L.  Number one, our sales or our revenue. Secondly, our cost of goods and our labor, which are our prime costs. Third, our operating expenses. And fourth, our profit or loss.

Keeping a P&L on your business on an ongoing basis can be immensely helpful. Understand that it does three important things for you. It helps you to evaluate your business, it helps you to manage your business, and it helps you to measure your business.

1. Evaluate your Business

Let’s look at this from an evaluation perspective. What does this do for you? It helps you to evaluate your investment. You haven’t made your determination if you’re going to get into the franchise. You should understand whether the investment you’re going to make is going to drive a profit; none of us want to get into a business and lose money. Keeping an up-to-date P&L allows you to evaluate your business, and if you’re going to borrow money, it helps you to go to the lender and show them that your business is profitable so they’ll lend you money.

2. Manage your Business

Once you’ve made the decision to purchase the franchise or other small business, you’re now going to have to manage that business. A profit and loss statement is the tool that you use to manage your business. It allows you to see what you originally evaluated and originally forecasted your business to do, and then manage these components to a profit, and if you find, as you’re managing the business, that it looks like you’re going to a loss, it’s going to identify the areas that you need to focus on above here to generate sales, reduce costs or expenses to get you back to a profitable position.

3. Measure the Value of your Business

At some point, you may want to sell your business. What is this going to do for you? It’s going to help you to measure the value of your business so that when you go to sell it, you can intelligently tell a potential purchaser what the value of the business is.

Please leave a comment below or let me know if you have any questions. In the very near future, we’ll publish a post that will walk you through a live example of a P&L.

That wraps up this post! Thank you for stopping by and please share this with someone that is interested in franchising or small business.

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Franchise Frankness does not know your individual circumstances and provides information for general educational purposes only. Franchise Frankness is not a substitute for, and should not be used as, professional legal, credit or financial advice.