California SBDC Shows Small Businesses How to Maximize Business via Profit and Loss Statements

In a Q&A with the Los Angeles Regional Small Business Development Center (SBDC), Loan Advisor Bill Sorotsky explains how small businesses can use Profit and Loss Statements to boost their businesses. As the direction of the economy remains uncertain, is it all the more beneficial for small business owners to heed advice such as this.

So what is a Profit and Loss Statement (P&L)?

Also known as an income statement, it is a summary of the company’s profit or loss during a given period of time – traditionally a month, quarter or year. The report details all revenues and operating expenses for the business.  The beauty of a P&L is that it outlines for the business areas in which they can reduce costs and boost profits.

But why would you need this instead of just a traditional cash flow statement?

A P&L is useful for two reasons. First: a P&L helps to secure SBA and commercial bank loans. As Sorotsky explains, a P&L “provides evidence of historical and current profitability, establishing your business’s cash flow and your ability to repay the loan.” Second, P&Ls are based upon accruals, whereas a cash flow statement is based upon a cash basis. Though they are interrelated, a P&L adds back non-cash and non-recurring items.

P&L statements also help small businesses project businesses growth (or decline) in to the future. For example, a P&L will tell you whether if you’ve got increasing sales and declining profits—and then you’ll be able to look for the costs to explain why this is the case and adjust accordingly. Perhaps your rent has increased more than you had expected; a renegotiation of the lease or move would help correct for declining profits.  

For other tips on how and why to use a P&L statement, read the entire Q&A article here. For additional small business related information, visit the California SBDC. 

BY Amanda Maher on December 21st, 2011

TAGS: small business | business | capital