Understanding Profit, Loss, and More
This year, 2020 has been strange on so many levels for all of us. Almost like an episode of The Twilight Zone, and that couldn’t be more true for businesses. On a good side, all the chaos got everyone a 3 month extension on filing taxes. However, it only delayed getting the profit loss ledger updated. It’s all about profit and loss.
The average person thinks that a business is all about the sale and make that dollar, and that is true, but not the complete picture. The profit or loss from business can be what determines if a business keeps going or closes their doors. Just because the parking lot is always full, and a line is always in the store, doesn’t mean their profit and loss is where it needs to be to keep the doors open.
If you don’t understand profit and loss, you probably have profit loss basic questions, and we will answer some of those in this piece. If you are thinking about opening a new business, it would be beneficial to sit down and talk with a business consulting firm and get a basic profit and loss lesson for Dallas, TX businesses.
What is profit loss?
Two terms key in the business world are profit and loss, and they are what determines the financial returns a business owner realizes. To calculate the profit and loss of a business, we look at the activity of the business and get the total revenue, then subtract the expenses of operating that business.
Total Revenue – Total Expenses = Profit and Loss
If you get a negative number, that is how much the business lost. If you get a positive number, that is how much profit the business made.
How is profit and loss account calculated?
There are a lot of numbers involved to calculate a business’ profit and loss statement, sometimes referred to as an income statement by accountants. Those numbers come from many references and sources, with the resulting profit and loss creating the picture of the business’ financial performance for the month, the quarter, the year, or any period needed. The information needed to create a profit and loss statement of a business include:
- BANKING records: A business’ banking records are used in creating a profit and loss statement. These records need to include all transactions related to the bank accounts and credit card records that outlined any purchases made for business purpose and use.
- CASH records: They need all cash purchases made for business purpose and uses to prepare the profit and loss statement. This includes all petty cash transactions that applies to the business.
- INCOME sources: A profit and loss statement will require a record of all income sources. This includes cash, check, credit card, net billing, and online payments made by clients.
Is loss of profit a direct loss?
Within the profit and loss of operating a business, there are direct losses and indirect losses. For the non-accounting person, this can confuse. Most business owners aren’t 100% clear on this topic either.
No, a direct loss or an indirect loss can be the starting point for a profit loss, and this is determined on the facts, case by case. A direct loss comes about naturally through the course of things when all parties entered the contract and a breach of that contract is in question. A direct loss and the breach of contract is considered foreseeable and recoverable.
An indirect loss arises from special circumstances. For instance, if one party of a contract is a breach of the contract and have an awareness of any special circumstances, the other parties in the contract may recover their losses.
What is the difference between direct loss and indirect or consequential loss?
A direct loss is one where a business catches on fire and loses everything, or most of what is in their building. There is nothing left to recover from the fire. Whereas with an indirect loss, are also referred as “consequential loss” within the insurance industry and the policies that are issued. This type of loss isn’t from the fire and smoke damage itself, but the consequences of the business a company will lose when they aren’t able to operate as usual.
Can it be that simple? Absolutely not! That is why there are courts and lawyers. They keep things interesting. As we mentioned, even business owners are confused when it comes to consequential or indirect loss. The courts now have different approaches to the clauses that seek to exclude or include consequential or indirect loss from damages sustained. Sometimes, we may regard a consequential loss a direct loss.
What does direct loss and indirect loss have to do with profit and loss for a business? If your business suffers from a fire or a storm that renders your place unusable, you will lose revenue. So, instead of having sales that go towards your profit, you’ll have losses to report, especially anything that the insurance will not cover.
Which loss is an example of a direct loss?
- Some examples of direct profit loss would be:
- Fire and smoke damage to place of business
- Theft from place of business
- Car crashing into place of business
- Storm damage to place of business
While each of these is a direct profit loss for a business, they each can create an indirect loss too. Fire and smoke damage, storm damage (i.e., the roof is gone), or vehicle crashing in to building can leave the business unable to produce their goods or serve their customers. Those customer’s take their business elsewhere, creating an indirect loss.
You have a dream of opening your own business come true. You know what you want to produce or provide the public or a specific industry. You get it all rolling along, even hire an employee or two. Then comes the tax man and you don’t have any idea how to handle filing the various types of taxes. Profit and loss to you isn’t what the tax man is interested in, so what do you do?
The best advice is to find a business consultant, one that specializes in small business. They will talk to you about their services and how your company will benefit. They will discuss the profit to loss ratio that your business has currently and how to improve those numbers. A business consultant is up-to-date on tax laws and will make sure you are filing what taxes you need to file on time. Connect with our team today about profit and loss in Dallas, TX today!