Is the Profit and Loss Statement a necessary business tool? Yes! But just because it is required does not mean it is useful. What makes it necessary? Bankers request it when you are applying for a loan. Your tax professional uses it when filing your tax returns. Insurance companies use it when auditing your policies. So yes, there are reasons to have a p&l statement for your business.
What makes your Profit and Loss Statement a useless business tool?
Making business decisions based on your profit and loss statement is like driving your car using only your rear view mirror. By definition, profit and loss statements are a record of revenues and expenses incurred by your business in a specific time period.
Yes, you will see what you have been able to accomplish and hopefully celebrate that success, but it does not predict what is to come in your business.
Your P&L Statement does not show you an accurate picture!
As an accountant, this is one of my clients' most confusing ideas to wrap their heads around. Why doesn't your P&L statement paint an accurate picture? It's not your accountants' fault. It's simply the way it is designed to work.
I found a great article on Inc.com that will explain what is going on “5 Ways Your Profit and Loss Lies(And Why It Might Cause Your Business To Fail)”
One of the main problems is that it may look like you are profitable, but you don't have the cash in the bank to pay yourself. This is because of the way sales are recorded, how inventories are tracked, and how loan repayments are not tracked on a p&l.
If your Profit and Loss is not the tool you need then what is?
If you want an accurate picture of what has happened in your business, ask your bookkeeper to provide you with a Statement of Cash Flow also known as a cash flow statement. A statement of cash flow tells you exactly how much money came into the company during a specific time frame and where it came from. Then goes on to tell you exactly how you spent that cash.
Now you can understand why it looks like you might have made a profit but your checking account is empty.
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