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The Business Plan: The Income or Profit and Loss Statement

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At its very core, the function of a business is to make money. The main reason for a company to be registered is so that it can be accountable, if not its just people who are giving away their services for free. If any entrepreneur says they are not in it for the money (at all), then they should not be running a business and should be running it as a charity.

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Even if the entrepreneur is not driven by money alone, as a minimum, he or she should be driven by the need to create wealth for the company, so that it can be sustainable and can provide for the livelihood of its employees.

In the view of Accounts and Finance, the income statement (or the profit and loss statement) captures the success of the business, showing how revenue will be streaming into the company as the plans get executed.

The statement also measures how the money is being spent and how efficiently the money was spent by way of measure of the various cost items in this statement. i.e. How much revenue was made compared to the money spent to produce and sell the item? It therefore measures how effectively the business is being conducted according to the gross profit margins (GPM) and net margins.

Comparing income statements over past years, you will also be able to see the growth of the business, through the increase/decrease of revenue for various time periods. This helps decision makers see how stable or how well the company is conducting its business. To help decision makers better, the financial projections should be stated over a period of time. This time can vary from business to business, but typically the financial plan should be done for a period of three to five years.

For investors the income statement allows them to analyse how well the company is doing in its target market. It helps them to gauge future projections better, on whether the company will perform well in the coming years and whether the product/service is a worthwhile investment.

That being said, we will look into the Balance Sheet and the Cash Flow Statements in the upcoming weeks, to see their importance and to understand how companies are evaluated.Screen Shot 2013-01-10 at 6.30.54 PM

A Sample P&L Statement

 

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