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How Is a Profit & Loss Statement Useful To a Business

How Is a Profit & Loss Statement Useful To a Business

A profit and loss statement is a financial statement that summarizes the revenues, expenses, and costs of a business over some time. It is often called a statement of operations, earnings statement, income statement, statement of financial results, or expense statement.

This statement is crucial as it constitutes one of the three essential financial statements, including a cash flow statement and balance sheet, that reflect its financial performance.

Essentially, it is issued annually or quarterly, depending on the rules of the company.

So, what are the other benefits of a Profit and Loss statement? How is it beneficial for your business? 


This article will explore various benefits of such statements:

Benefits of profit and Loss Statement 


It reveals the financial health status of your company

One sure way to know if you are running your business at a loss or having profits no matter how little it is by updating your profit and loss statement. It reveals your profits as well as your losses. Subsequently, you know if your company is financially healthy or whether you need to put in more effort. 


Smarter Decisions are Made

With a profit and loss statement, you can frequently review the performance of your business. Your findings will propel you to make smart financial decisions because you have an insight into the financial state of your business. If the results are positive, you can make more investment into the business and avert potential pit holes.


It serves as an assessment tool.

It’s required that a student takes frequent tests and examinations to not only reveal their inadequacies but to assess their level of improvement. Regardless of the input and efforts you put into your business, if you are not doing a frequent assessment, all your efforts may become futile. 

You must assess your business growth and dynamics. A profit and loss statement is an assessment tool that can help you achieve this result. One can use it as a weekly, monthly, or yearly assessment tool.


Funding requirement

All businesses will need funds to push their goals and objectives at one point or the other.

Lack of funds can impede the growth of any business. One of the significant financial backbones of most business owners is banks or financial institutions. However, it required that they have a profit and loss statement to have access to funds in loans. 

An updated profit and loss statement will help them know your business's financial strength- income debt load and determine the amount they will be willing to give.


Helps for filing for Taxes

It's common to see most business owners have a tough time during tax season. But, if your profit and loss statement is regularly updated, you won't have to go through such hurdles because you will already have all the information you need for filing your business taxes. 

Usually, the net income figure derived from the profit and loss statement is the basis for calculating the amount of tax you will require to pay.


For Partnerships and Collaborations

For business growth and diversifying purposes, you may have to collaborate and partner with investors and the like.

It’s required that they look through your profit and loss statement before signing a deal. Having one proves your integrity and shows your level of diligence and seriousness.


Conclusion

A Profit and Loss statement is not only beneficial to your business. But also mandatory because most countries and associations require that you update it frequently. More like a law. It is a primary document that should never be undermined. Its often an indicator of your business health, strength, and stability.

You can experience growth and prepare for unforeseen situations. 


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