The difference between an income statement and a profit and loss statement is in name only. Both of these terms refer to a report that shows the overall sales, expenses and net income. How does understanding this type of statement help business owners understand their financial health? The income statement is one of the easier ways to see whether or not a company is profitable, giving owners an opportunity to decide whether to increase sales, decrease spending or both.
When increasing sales, it is important to maintain proper cash flow to ensure that the business can sustain the growth that will happen. An uptick in customers will require more resources and greater production, thus increasing expenses on things such as inventory, labor or both. Sometimes there are issues with ramping up production that can cause unforeseen expenditures. Whatever the case may be, it is important to revise every decision with an experienced financial professional who can help owners decide what the best course of action will be.
As a company spends more money, there may come a time for reducing costs in order to preserve business functions and continue operations. Some common methods of cost reduction include decreasing the payroll, downsizing inventory, and re-strategizing business processes. Reducing the overall expenditure on payroll expenses can either mean a paycut to employees, laying off unnecessary staff, or a combination of both. Downsizing inventory can help reduce the overhead by getting rid of things that don’t sell as often or at all. One example of restrategizing business processes may involve finding a more efficient way to produce a current product without spending more.
For a company where both may be appropriate, careful consideration should be given to each aspect of the business. Accurate financial statements should already be prepared to help the financial professionals and owners work together with clear and up-to-date information. Focusing on sales or cutting costs more will depend on the goals of the company and current financial health.
Important data from an income statement will help the business owners and financial professionals verify if a company is making money or headed into trouble. At JTC CPAs, we are experienced in bookkeeping and can help make sure that the statements are accurate. Schedule a free consultation today and be sure to ask about our bookkeeping offers for small businesses.