Have you ever wondered where the money goes when it seems like your business is booming? Do you ever get lost in the numbers and can't figure out where the profit is?

A lack of clear financial control can lead to a loss of funds and growth opportunities. That's why a profit and loss statement (P&L) is an indispensable tool for every entrepreneur. It helps you see hidden problems and find ways to solve them, ensuring the sustainable development of your business.

‍Why is a profit and loss statement necessary for business?

Assessment of financial performance

A profit and loss statement allows you to assess the financial performance of your company in detail. You can see whether you have achieved your financial goals by comparing income and expenses.

For example, a restaurant owner can use this report to determine which dishes bring the most profit and which ones should be removed from the menu.

According to a study by the U.S. Bureau of Labor Statistics,

About 20 percent of small businesses close within the first year, 30 percent within two years, and 50 percent within five years, largely due to a lack of financial control.

Budgeting and strategic planning

With a regular profit and loss statement, you can plan your budget more effectively and develop development strategies.

For example, a company may find that it spends too much on marketing and redirect these funds to innovation or staff training.

According to a study by CB Insights,

One of the main reasons startups fail is a lack of proper financial planning and management, accounting for up to 39% of all failures.

Monitoring and controlling expenses

The income statement helps to identify excessive costs and find ways to optimise them. It provides an opportunity to respond to cost increases in a timely manner and take measures to reduce them, which helps maintain the company's financial stability.

Thanks to cost analysis, Dmytro Sheremeta, owner of Chistota cleaning company, saved UAH 500,000 a year.

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Dmytro's company has always strived to provide high-quality cleaning services, using the necessary equipment, such as vacuum cleaners and ladders, which had to be delivered to the place of service. The cost of this delivery was usually included in the total price of the service. To transport the equipment, the company often used taxis, which resulted in unpredictable logistics costs depending on weather conditions, days of the week, and current taxi demand.
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After analysing the costs using the profit and loss statement in Finmap, Dmitriy discovered that the company's logistics costs were higher than expected. Together with his team, he started looking for ways to reduce these costs. After careful analysis, it was decided to change the type of delivery and find a partner who transports goods using electric scooters. This approach not only reduced delivery times, but also eliminated the dependence on fuel prices, making the cost of transportation more stable.
Before the cost optimisation, one round trip delivery cost the company UAH 350, while after the implementation of the new logistics strategy, the cost dropped to UAH 100. This has significantly reduced logistics costs and increased the company's efficiency.

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Reporting to stakeholders

Investors and lenders pay attention to the income statement when assessing a company's financial position. This is especially important if you are planning to attract investments to scale your business. Reliable financial statements increase your attractiveness to investors.

The income statement is an indispensable tool for every entrepreneur. It provides a clear picture of the company's financial position, helps to identify hidden costs and optimise resources. Using this report allows business owners to plan effective strategies, make informed decisions based on real data, and ensure business stability and growth in the long term.

How to create a high-quality Profit and Loss report?

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A well-crafted income statement is the foundation of your business' financial health. It not only helps you understand the current state of affairs, but also opens up new opportunities for growth. To make your report as useful as possible, follow these key steps:

1. Select the reporting period. Determine the period for which the report will be prepared. It can be a month, quarter, or year, depending on the specifics of your business and industry standards.
2. Gathering financial information. Gather all the necessary financial data: revenues, expenses, operating profit (or loss), interest, taxes, and other financial indicators. It is necessary to collect not only the movement of funds on official accounts, but also on cash desks, cards, wallets, etc.
3. Classification of income and expenses. Carefully classify all income and expenses by their purpose and nature. The main income (from the sale of goods or services) and additional income (from investments, licences, etc.) should be separately identified. Expenses should be divided into categories, such as salaries, materials, marketing, administrative expenses, etc.
4. Calculate the net profit (or loss). Subtract total expenses from total revenue to calculate net profit or loss. This indicator is critical for assessing the company's financial position.
5. Comparison with previous periods. Compare the results of the reporting period with previous periods to identify trends and analyse the dynamics of financial indicators.
6. Prepare an analytical report. After preparing the main income statement, prepare an additional analytical report that contains detailed information on individual components of income and expenses, as well as an explanation of the reasons for changes in financial indicators.
7. Visualise the results. Use visualisation tools to improve understanding and ease of perception of financial information. Charts and dashboards help you quickly assess the company's financial position.
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Additional tips:

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• Retrospective analysis. Compare results with previous periods to identify trends and predict future expenses and income.
• Market analysis. Take into account changes in the economic environment and market trends that may affect the financial performance of your business.
• Distribution of money. Separate your own funds from business funds. This will avoid the very common mistake of mixing finances.
• Professional approach. Take the advice of a professional financier for qualified quick advice on setting up accounting. If you do not have the funds for ongoing support, the first consultation will set the owner on the right track.
• Technological solutions. Use modern tools to automate financial accounting. For example, Finmap integrates with banks and payment systems, simplifying the process of data collection and analysis.

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By following these steps and income statement standards, you will get a clear and objective view of your company's financial position. This will allow you to manage your business more effectively and make strategic decisions that will contribute to its growth and stability.
For maximum convenience and efficiency, automate your accounting with Finmap and forget about complicated home-made spreadsheets. Finmap integrates with banks and payment systems, providing you with convenient graphs and dashboards that greatly simplify analysis and make informed business decisions.