PnL = cash earned by an enterprise over a specific time period – costs incurred over that time period
That is, this formula can be simplified to the following form:
PnL = revenue – costs
The calculation of PNL will differ depending on the type of business activity carried out. In the example considered above, a limited number of indicators were taken into account when calculating this metric, since the home bakery is a small business without its own office, numerous departments, as well as warehouse and production facilities. Larger corporations will take into account many more indicators when calculating PNL.
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PNL Tasks
First of all, the PNL report helps determine how effectively the enterprise uses its available resources, as well as identify areas where costs can be reduced. In addition, the PNL calculation helps businessmen make management decisions more accurately and reasonably, for example:
determine the pace and direction of the company’s development, what its strengths and weaknesses are (that is, identify the products that bring the greatest profit to the organization, and the products that need to be improved or discontinued);
record the moment of a sharp change in financial indicators;
understand the profitability of the business and its ability to grow and develop in the future;
adjust costs;
identify areas for scaling up activities.
The Profit&Loss report is used by business owners and investors to assess the effectiveness of trading and the payback period of financial resources invested in the company. It is also useful when applying for a loan from a bank to determine the solvency of the company as a borrower.
PNL Tasks
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Key features of the PNL report include:
Income and revenue data is found at the very beginning of the report.
Administrative and sales related costs are considered overhead costs.
Gross profit is calculated as a percentage (i.e. as a ratio of the company's profit). This metric is of particular importance to investors when studying the financial performance of a business.
The cost of goods produced and services rendered is indicated as a separate item in the report.
All tax payments and mandatory deductions (for example, loan payments) are also listed separately.
The final block of the report records the overall results of the organization’s economic activity (net profit or loss, etc.).