How to Read Company Financials Part One - Understanding Profit and Loss Statements with Stacey Bennett

Part One of a Guide to Navigating Your Company's Financial Performance: Demystifying Profit and Loss Statements for Smarter Decision-Making and Long-Term Success.

I extend my sincerest gratitude to Stacey Bennett for sharing her invaluable insights and expertise on understanding profit and loss statements and empowering business owners to make more informed financial decisions.

In a recent episode of the Metal Steel Manufacturing Podcast, host Greg Sheldon welcomed Stacey Buck , an accountant, profit coach, and strategist, to share her expertise in understanding company financials.

This article summarizes key insights from their conversation about reading profit and loss statements, an essential skill for business owners and entrepreneurs.

Understanding Profit and Loss Statements

Profit and loss (P&L) or income statements provide a snapshot of a company's financial performance over a specific period.

They outline revenues, expenses, and the resulting profit or loss.

Stacey Bennett highlights the importance of understanding the P&L statement to make informed decisions and ensure a business runs efficiently.

Breaking Down the Profit and Loss Statement

1. Revenue, Sales, or Turnover: The first section of the P&L statement includes all income generated by the company through sales or services provided. It's crucial to keep accurate records of all income streams to understand the company's financial health clearly.
2. Cost of Goods Sold (COGS): This section details the direct costs of producing goods or providing services. COGS includes expenses such as materials, labor, and overhead costs. By comparing COGS to revenue, business owners can determine their gross profit and assess the efficiency of their production process.
3. Operating Expenses or Overhead: These are the indirect costs of running a business, such as rent, utilities, marketing, and salaries for non-production staff. Understanding operating expenses is critical to identifying areas where costs can be reduced or controlled.
4. Net Income: The final figure on the P&L statement, net income is the result of subtracting total expenses (COGS and operating expenses added together) from total revenue. This number represents the company's profit or loss during the specified period.

Engaging with Your Financial Team

Bennett encourages business owners to proactively understand their company's financials and work with their accounting team.

Open communication with accountants and bookkeepers helps ensure accuracy and allows business owners to make informed decisions about their financial strategy.

It's also essential to find an accountant interested in providing education and coaching rather than simply focusing on tax preparation.

As technology continues to disrupt traditional industries, more accountants are embracing higher-level consulting and advising to deliver value to their clients.

Final Thoughts

Understanding profit and loss statements is crucial for business owners looking to make informed decisions and optimize their company's financial performance.

By engaging with a knowledgeable accounting team and taking an active interest in their company's financials, business owners can better manage their financial strategy and achieve long-term success.

Stay tuned for the next installment in this series, where Stacey Bennett will discuss the balance sheet and its importance in understanding company financials. Thank you, Stacey!

Listen to the episode here:

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