Growing Your Business

Understanding Your Profit and Loss Statement

Delia Mena
Understanding Your Profit and Loss Statement

Profit and loss statements are one of the tools you can use to determine how well your business does at buying and selling inventory and making the sort of strong profits needed to thrive. These statements can help you determine your tax liability and also help you show the value of your business when you are courting outside investors to help with your growth.

What's the Difference Between Profit and Loss, EBIT and EBITDA?

Profit and loss is the net income of your business after all income and expenses have been calculated. EBIT refers to earnings before interest and taxes. With EBITDA, you also pull depreciation and amortization from your metrics.

Neither of these two latter measurements are part of the generally accepted accounting principles (GAAP). However, they are used by investors who wish to determine the value of a company. EBITDA, for instance, makes it easier for investors to compare the difference the profitability of two companies that have significantly different processes. If you are considering bringing in investors, being able to present all of these figures can help them decide whether they want to get involved.

How to Create a Profit and Loss Statement

A profit and loss statement (P&L) summarizes your business's revenues, minus the costs that you incur while doing business over a specific span on time. Analyzing your company's P&L statement can give you information about your ability to repay any existing debt that you have and whether you can shoulder the ability to take out loans to expand your business. 

To arrive at the figure, list all of the revenue that you have coming in, minus any discounts. The period can be a quarter, a fiscal year or any other set period of time. Next, you will want to calculate your cost of goods (COGS) or your cost of sales. This will include labor, materials and other related expenses. Subtracting those expenses from your revenue gives you your gross profit.

From that, you will deduct expenses like rent, bad debt, marketing costs and wages of employees who are not directly involved in production, such as support staff, managers and accountants. This gives you your EBIT. Once you subtract interest and other expenses, you get your earnings before taxes. By deducting tax costs, you will arrive at your business's net income.

When you fully understand your financials and how potential investors use them to make decisions, you have a better grasp on how well you are actually doing and what makes your company attractive to potential investors. By running these numbers regularly, you can see where you are vulnerable, where you are doing well and where you may need to adjust to ensure your business's future success.

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Delia Mena

Delia Mena

Delia Mena, CPA is a Tampa based tax professional who specializes in accounting and tax preparation. Delia is the founder of her own tax based practice, Delia's Accounting Service, based in Tampa, FL. With over 12 years of experience, Delia's practice is fully equipped to assist clients with any of their financial needs. Delia's Accounting Service provides the perfect mix of independent paralegal's, bookkeepers, and notary public professionals providing high quality services to a wide range of clients. To learn more about Delia and her practice, visit her website.

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