How to control finances and manage the strategy of a young company?

Service Business

It happens that a young company has to deal with many problems. Among them are the expenses that may turn out to be greater than the profits in the first period of its operation. However, the company's situation is likely to start to change. Perhaps there will be loans or other forms of financial support, and then finally earnings. How to control the finances of a young company?

Profit and loss account, or how to control finances in the company

A company's profit and loss balance sheet shows its earnings and losses over the last accounting period (usually a year). It allows the entrepreneur to see if his business uses resources to generate profits. However, this is not the most reliable statement, as profits can be made using many ways that cannot be listed in the balance sheet. Just like looking at him, you can't get to know the causes of the company's losses. Therefore, in order to have full control over the finances of your company, it is worth keeping a profit and loss account. It presents the course of the company's operations in a specific period of time (within a year, half-year or quarter). By reviewing it, you can find out the reasons why the company earned certain profits or losses, because it includes all types of revenues, as well as the costs related to their achievement.

Correct construction of the profit and loss account

In a simplified definition, the profit and loss account is a statement of the reasons for the company's achievement of specific financial results in a selected accounting period. To this extent, the financial statements would consist of:

  • revenues,

  • costs,

  • financial result.

However, the above version of the income statement is not very detailed. The entrepreneur, as in the case of the balance sheet described above, still could not learn anything about the origin of specific revenues. Detailed information about them is important because, for example, if the enterprise obtained income from its own production, it proves its proper development. On the other hand, when the earnings come from, for example, the sale of the company's buildings and machines, this indicates a reduction in the scope of its operation.

An appropriate statement of costs is also important to exercise proper control over the company's finances. Knowing, for example, that its losses are caused by rising production costs, we can predict that the company will receive less and less profit from this. The awareness of such a perspective will prevent it from self-realization in the future.

Moreover, the very simplified financial statements presented above do not contain one more, very important component - income tax. It is important due to the fact that it largely affects the profit that can be used in the following years.

In order to find out the exact reasons for your company's losses and profits, and to be able to regularly calculate the value of income tax paid, it is best to keep a profit and loss account in a much more complex form - with specific groups of income and costs. Structurally complex financial statements can take two forms: spreadsheet and comparative.

Profit and loss account: calculation version

Both the calculation variant and the comparative variant of the profit and loss account should be prepared in a fragmentary version. It consists of subtracting the same type of cost from each income.

The calculation form consists in presenting the result taking into account subsequent groups of costs and revenues divided according to the place of origin. It should look like this:

A. Net revenues from the sale of products, goods and materials, including:

  • from related parties

  1. Net revenues from the sale of products

  2. Net revenues from the sale of goods and materials

B. Costs of products, goods and materials sold, including:

  • related entities

  1. Manufacturing cost of products sold
  2. The value of sold goods and materials

C. Gross profit (loss) on sales (A - B)

D. Selling expenses

E. Administrative expenses

F. Profit (loss) on sales (C - D - E)

G. Other operating income

  1. Profit on the sale of non-financial fixed assets
  2. Subsidies
  3. Other operating income

H. Other operating expenses

  1. Loss on disposal of non-financial fixed assets
  2. Revaluation of non-financial assets
  3. Other operational costs

I. Profit (loss) on operating activities (F + G - H)

J. Financial income

  1. Dividends and profit sharing, including from related parties
  2. Interest, including interest from related entities
  3. Profit on disposal of investments
  4. Investment value update
  5. Another

K. Financial costs

  1. Interest, including for related entities
  2. Loss on disposal of investments
  3. Investment value update
  4. Another

L. Profit (loss) on economic activity (I + J - K)

M. Result on extraordinary events (M.1. - M.2.)

  1. Extraordinary profits
  2. Extraordinary losses

N. Gross profit (loss) (L +/- M)

O. Income Tax

P. Other mandatory profit reductions (loss increases)

R. Net profit (loss) (N - O - P)

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Profit and loss account: comparative version

The difference between the comparative and the calculation variant of the profit and loss account is the method of determining the net result on sales. The calculation version is based on obtaining a result by listing subsequent groups of costs and revenues, broken down into production, sales and management, i.e. the place of origin. The comparative option is to break down the costs according to their types.

A. Net revenues from sales and equivalent revenues, including revenues from related entities

  1. Net revenues from the sale of products

  2. Change in the status of products (increase - positive value, decrease - negative value)

  3. The cost of manufacturing products for the unit's own needs

  4. Net revenues from the sale of goods and materials

B. Operating expenses

Depreciation

  1. Usage of materials and energy
  2. Foreign Service
  3. Taxes and fees, including excise duty
  4. Salaries
  5. Social security and other benefits
  6. Other costs
  7. The value of sold goods and materials

C. Profit (loss) on sales (A - B)

D. Other operating income

  1. Profit on the sale of non-financial fixed assets
  2. Subsidies
  3. Other operating income

E. Other operating expenses

  1. Loss on disposal of non-financial fixed assets
  2. Revaluation of non-financial assets
  3. Other operational costs

F. Profit (loss) from operating activities (C + D - E)

G. Financial income

  1. Dividends and profit sharing, including from related parties
  2. Interest, including interest from related entities
  3. Profit on disposal of investments
  4. Investment value update
  5. Another

H. Financial expenses

  1. Interest, including for related entities
  2. Loss on disposal of investments
  3. Investment value update
  4. Another

I. Profit (loss) on business activities (F + G - H)

J. result of extraordinary events (J.1. - J.2.)

  1. Extraordinary profits
  2. Extraordinary losses

K. Gross profit (loss) (I +/- J)

L. Income tax

M. Other mandatory profit reductions (loss increases)

N. Net profit (loss) (K - L - M)

To sum up, people managing a company who want to have proper control over its finances and direction of development should try to keep a profit and loss account in an extensive, complete form. It is also up to the managers which of the financial settlement options - calculation or comparative - will be used in their company.