As a business owner, you're required to provide a variety of financial forms to different entities, including investors, lenders and the IRS. You might find this process a chore. Instead, think of it as an opportunity. These forms are like cameras that give you a clear, comprehensive picture of your business.
Let's look at two of the more important financial reports: your balance sheet and your profit & loss (P&L) statement. Your balance sheet is like a snapshot: it captures a moment in time. The P&L statement is more like a video that documents your business over a longer period.
Your balance sheet details all assets, liabilities and equity for a specific date. It encompasses everything your business owns and everything it owes at that particular moment.
In other words, the balance sheet shows the worth of your business.
The P&L statement, on the other hand, covers more time—usually a fiscal quarter, but sometimes an entire year. It summarizes the revenues earned and expenses/costs incurred during that reporting period, showing whether you're making money, losing money or breaking even.
And that, in turn, answers the business owner's most important big-picture question: Is the company generating profit?
If the answer is no, the P&L statement can help address some important follow-up questions, such as:
- Is profitability even possible?
- Which costs and expenses can be eliminated or reduced?
- Which sources of revenue can be enhanced?
Getting Better Resolution
When you need an accurate picture of how your business is performing—maybe you're preparing a presentation for investors or strategizing with your team about important business decisions—remember that these two statements are valuable tools.
Consult with your bookkeeping-services provider for more information.