In order to find out the effectiveness of the enterprise, the owner draws up a profit and loss statement. Thanks to this document, you can find out how much income exceeds expenses or vice versa.
The P&L statement includes all profit and loss items, which makes it possible to track the financial picture of the company. The importance of this report is to determine how much money the company has earned (lost) over a certain period of time. Understanding this point helps to identify the weaknesses of the business, to find mistakes, the elimination of which will give an increase in income.
This report provides an understanding of how to properly manage funds:
- where to invest in order to achieve efficiency;
- where to withdraw the invested finances, since they do not bring the expected profit;
- how to allocate resources correctly and, if necessary, change production activities to more profitable ones.
There are several versions of this report. There is a profit and loss statement with a balance sheet.
How to generate a profit and loss statement correctly
This report can be generated in two ways:
- cash method. This method is well suited for small companies. It is implemented by clearly recording all receipts. This version of the report reflects all cash transactions of the company performed during the specified period;
- accrual method. In the process of implementing this reporting method, it is necessary to record not only the receipt, but also the expenses of the company. This report gives the owner a complete understanding of what is happening in his company. Creating a report using the accrual method is universal, as it is suitable for any type of business.
Each of the methods has its advantages and disadvantages, and only the owner of the company decides which of the above methods to control the effectiveness of his enterprise.
