Many business owners struggle to understand their financial reports. One of the most frequent questions we receive as bookkeepers, consultants, and accountants is “Where did my money go?” When you look at the bottom line of your Profit & Loss report (aka Income Statement, Statement of Operations, Statement of Activity) it does not show all expenditures. For instance, capital improvements, purchasing assets, and paying principal on loans are not reflected on your Profit & Loss report. Distributions and Owner Draws are also not shown in the P&L report.
Profit & Loss reports show the financial health of the business over a specified period of time. It can be used to compare quarter-to-quarter operating expenses, costs of sales, and profit margins. If asset purchases and capital improvements were reflected in this Statement of Operations (P&L), it would skew those numbers and make comparisons difficult. Also, the principal portion of loans is not an expense because the items purchased with those loan funds have already been expensed. A P&L report only reflects the revenue/income and expenses of the business.
A Balance Sheet report (Statement of Financial Position) shows the running tally of asset purchases, accumulated depreciation, loan balances, and owner equity. However, one of the most important reports a business owner can understand is their Cash Flow Statement. The Cash Flow Statement merges aspects of the P&L and Balance Sheet reports to give a starting cash balance and ending cash balance for a period of time. This report will help business owners understand how their profit was spent and answer the question “Where did my money go?”
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