| It might seem obvious, but in managing a | | | | Profit and Loss, it might seem like a no-brainer to |
| business, it is important to understand how the | | | | define just exactly what profit and loss are. But |
| business makes a profit. A company needs a | | | | of course these have definitions like everything |
| good business model and a good profit model. A | | | | else. Profit can be called different things, for a |
| business sells products or services and earns a | | | | start. It is sometimes called net income or net |
| certain amount of margin on each unit sold. The | | | | earnings. Businesses that sell products and |
| number of units sold is the sales volume during | | | | services generate profit from the sales of those |
| the reporting period. The business subtracts the | | | | products or services and from controlling the |
| amount of fixed expenses for the period, which | | | | attendant costs of running the business. Profit can |
| gives them the operating profit before interest | | | | also be referred to as Return on Investment, or |
| and income tax. | | | | ROI. While some definitions limit ROI to profit on |
| It is important not to confuse profit with cash | | | | investments in such securities as stocks or bonds, |
| flow. Profit equals sales revenue minus expenses. | | | | many companies use this term to refer to |
| A business manager should not assume that sales | | | | short-term and long-term business results. Profit is |
| revenue equals cash inflow and that expenses | | | | also sometimes called taxable income. |
| equal cash outflows. In recording sales revenue, | | | | It is the job of the accounting and finance |
| cash or another asset is increased. The asset | | | | professionals to assess the profits and losses of a |
| accounts receivable is increased in recording | | | | company. They have to know what created both |
| revenue for sales made on credit. Many expenses | | | | and what the results of both sides of the |
| are recorded by decreasing an asset other than | | | | business equation are. They determine what the |
| cash. For example, cost of goods sold is recorded | | | | net worth of a company is. Net worth is the |
| with a decrease to the inventory asset and | | | | resulting dollar amount from deducting a |
| depreciation expense is recorded with a decrease | | | | company's liabilities from its assets. In a privately |
| to the book value of fixed assets. Also, some | | | | held company, this is also called owner's equity, |
| expenses are recorded with an increase in the | | | | since anything that is left over after all the bills |
| accounts payable liability or an increase in the | | | | are paid, to put it simply, belongs to the owners. |
| accrued expenses payable liability. | | | | In a publicly held company, this profit is returned |
| Remember that some budgeting is better than | | | | to the shareholders in the form of dividends. In |
| none. Budgeting provides important advantages, | | | | other words, all liabilities have the first claim on |
| like understanding the profit dynamics and the | | | | any money the company makes. Anything that is |
| financial structure of the business. It also helps for | | | | left over is profit. It is not derived from one |
| planning for changes in the upcoming reporting | | | | element or another. Net worth is determined |
| period. Budgeting forces a business manager to | | | | after all the liabilities are deducted from all the |
| focus on the factors that need to be improved to | | | | assets, including cash and property. |
| increase profit. A well-designed management profit | | | | Showing a profit, or a positive figure on the |
| and loss report provides the essential framework | | | | balance sheet, is of course the aim of every |
| for budgeting profit. It is always a good idea to | | | | business. It is what our economy and society are |
| look ahead to the coming year. If nothing else, at | | | | built on. It does not always work out that way. |
| least plug the numbers in your profit report for | | | | Economic trends and consumer behaviors change |
| sales volume, sales prices, product costs and | | | | and it is not always possible to predict these and |
| other expense and see how your projected profit | | | | what income they will have on a company's |
| looks for the coming year. | | | | performance. |