I have been in business for the past 15 years and but only in the past one year have become more acutely aware of the how to best effectively run a business. And when I say ‘run a business’ I mean to understand your Profit and Loss Statements (P&L) and other critical information you need to make short term and long term decisions. One of the tools used to rate the health of your business is a balance sheet but most companies operate without either a P&L or balance sheet.
Why is this?
The answer is simple, many small companies try to do too much of the work themselves but get too bogged down to create these tools to use to make key decisions for their company. We are an outsourced solution as we create monthly P&L statements and can assist our clients in creating a balance sheet as well.
In this blog I wanted to simply breakdown the difference between the two as sometimes people don’t know the difference. The income statement (P&L) and balance sheet do share similar data including revenues, expenses and profits but there are important differences as well.
The significant difference between the P&L and balance sheet involves their respective treatment of time. The balance sheet is more fixed on one particular point of time while the P&L is a fluid document covering a particular period of time. It is common to have annual P&Ls but some companies like to have a better handle on their income and prefer quarterly if not monthly statements.
To find out if the company is profitable you will need to review the P&L statement while balance sheets are built more broadly and shows what the company is worth. The name “balance sheet” is derived from the way that the three major accounts eventually balance out and equal each other; all assets are listed in one section, and their sum must equal the sum of all liabilities and the shareholders’ equity. Balance sheets are built more broadly, revealing what the company owns and owes, as well as any long-term investments. Unlike an income statement, the full value of long-term investments or debts appear on a balance sheet.
The income statement requires simple calculations with income being added and one side while expenses are added on the other. This will show if the company is currently in the red or black when expenses are deducted from profits.
Both documents are very important for investors reviewing a company or to qualify for a loan from an institution and used together along with other financial documents will reveal operational efficiencies and the financial fitness of a company.