Hello, welcome to the Mis Centavos Podcast! This is episode 5.
I'm your host, Anita Monrroy, today I will recap the previous episode on the importance of a Chart of Accounts, and we're going to start talking about the Profit and Loss Statement - what it is and how it can help small business owners like yourself.
First of all, let's recap why having a Chart of Accounts is crucial for any business. As small business owners, keeping a clear record of our financial transactions is key to success. The Chart of Accounts helps us categorize and track all those movements, from assets to liabilities and everything in between.
A Chart of Accounts consists of several categories that help categorize and track your business's financial activities. These categories include Assets, Liabilities, Equity, Income, and Expenses.
Let us break it down further. What falls under the Assets category?
Assets represent what you own as a business. It can include things like bank accounts such as Checking and Savings accounts. It also includes physical assets like Cars & Trucks, Machinery, and Equipment. And let's not forget about Accounts Receivable, which is the money owed to your business by customers.
Now, let's move on to the Liabilities category. What does it cover?
Liabilities accounts represent what you owe to others. This can include Accounts Payable, which is the money owed to suppliers or vendors. It also includes Bank Loans, credit card balances, or any other outstanding debts your business has.
Next, let's talk about Equity. What does that entail?
Equity accounts reflect your residual value in the business. It includes things like Capital Stock, which represents the initial investment you made into the business. And if you have additional investments made by shareholders, those are categorized as Common Stock or Preferred Stock.
Now, let's dive into the Profit & Loss Statement. What is it and why is it important?
A Profit and Loss Statement, or P&L for short, is a fancy report that shows your business's income, expenses, and whether you made or lost money in a particular time frame, like a month or a year.
Think of it as a report card for your business's financial health!
Why is a P&L Statement so important for small business owners like us?
Well, it helps you keep an eye on your business's money situation. By looking at your P&L Statement often, you can figure out if you're making enough money to keep your business going or if you need to make some changes.
So how do we read a Profit and Loss Statement?
Basically, there are four sections to a P&L Statement. The first section is your revenue, which is how much money you made from selling your stuff or providing your services.
The second section of a Profit & Loss Statement is often referred to as "Cost of Goods Sold" or COGS. This section represents the direct costs associated with producing or delivering the goods or services that a business sells. It includes the expenses directly tied to the production process, such as the cost of raw materials, labor, and overhead expenses directly incurred in creating the product.
For businesses that sell physical products, the Cost of Goods Sold includes expenses like the cost of purchasing inventory, manufacturing costs, and any freight or shipping charges. It reflects the costs directly involved in producing the goods that were sold during the specified period.
For service-based businesses, the Cost of Goods Sold can be a bit different. It may include expenses related to delivering the services, such as labor costs for employees providing the services, subcontractor fees, or any direct costs associated with delivering the service.
By deducting the Cost of Goods Sold from the total revenue, businesses can calculate their Gross Profit. This figure represents the difference between the revenue generated from sales and the direct costs of producing those goods or services.
The third section is your expenses, which is all the money you spent to run your business, like paying rent, utilities, and salaries.
And the last section is the net income or loss, which tells you whether you made money or lost money overall.
Each section helps us keep track of our finances.
Your revenue section shows you how much money you made, and the expenses section shows you where your money is going. So, if you're spending more money than you're making, that is not good news! But if your expenses are less than your revenue, then you're in the green.
Now let’s discuss some tips for small business owners to make the most of their Profit and Loss Statement
One important thing to keep in mind is to separate your personal and business expenses. This means not using your business debit or credit card to pay for your personal pizza delivery or your Netflix subscription.
It's also important to keep accurate records of all your transactions.
Now let’s talk about common mistakes to avoid…..
A big mistake is not including all your expenses or not keeping track of your income and expenses accurately.
That can really mess up your P&L Statement, so make sure you are staying consistent with your record-keeping.
Establishing good accounting habits or systems is key to maintaining your businesses financial health.
Well, that's all the time we have for today. Thank you so much for tuning in, and we hope this episode gave you a better idea of what a Profit and Loss Statement is and how it can help your business.
Be sure to subscribe to our podcast for more tips. Para mas find me on Facebook, or on Instagram @miscentavos or on my website miscentavos.com
Until next time, hasta pronto!
