What is a Profit and Loss Report used for?
If a net profit is earned, this figure will be used towards
calculating the Income Tax payable to the government. This is done at
the end of every financial year (every 12 months).
If the year end result is a loss, there will usually be no income tax to
pay because losses are tax deductible but they are not so good for the
day to day running of the business as it means the cash flow will be
tight and it will be difficult to cover expenses.
If the business is applying for a financial loan, the loan provider
(like a bank) will want to see the applicant's Profit and Loss Statement
to analyze if loaning money to the business is a viable step.
Check the Cost of Goods Sold
To help the bookkeeper pin-point if the business is recouping its cost
of goods sold. i.e. is the business on-charging to customers all the
direct costs it incurred to complete a job?
Analyze Business Trading Trends
A chart of monthly summary figures taken from the Profit and Loss
statement is useful for showing the trends of business trading, such as
the rise and fall of income and expenses. This gives the owner an
opportunity to analyze the activities of the business and investigate
why, for example, income in one month was much lower than another month
which leads to the next point.....
…..An aid to Improve Business Operations
To help business management work out ways of improving business operations such as where to cut down on expenses.