Tracing Impact of Profit and Loss Statement on Business Loan

profit and loss statement significance in business loan

The Profit & Loss (P&L) Statement is one of the most important financial statements of any business. It serves as the base for analysis of the company and helps possible investors to understand the company’s strengths and operations. A P&L statement with future projections and historic data are the basis for obtaining a business loan.

Financial Lenders look at small businesses as high-risk investments. Hence, the better the P&L statement with all the required data greater are the chances of securing finance. A P&L Statement (Income Statement), well-designed business and strategic marketing plan, personal resume, and strong credit history are keys to getting a business loan easily.

To strengthen the P&L statement and obtain a financial loan; below are a few things to be kept in mind:

  1. Understand the importance of a P&L Statement for your business

P&L statement shows the summary of profits and losses made by the company for a particular period of time. That is nothing but the company’s revenues minus the expenses incurred like operational expenses, cost of goods sold, depreciation etc.

Apart from these, it also shows the cash in hand left for paying salaries, clearing debts and funds available to hire more employees. On the whole, it can be said that it is a company’s financial health report card.

  1. Setting Profit goals

Profit and loss statements can be used to track performance against the goals set. For example, if a company’s revenues went down or the expenses went high in a particular month or quarter, this statement would help the company plan a better marketing strategy to improve sales and plan to cut costs wherever necessary to have a profitable next month or quarter.

  1. Set Projections

Future projections of profits and losses plus a business plan to attain the numbers intended are required to convince a moneylender to provide you with the business loan required. A projection of one year is a must however; a plan for three years would provide a better impact on lenders.

  1. Regular Reviews

It is a good idea to get into the habit of reviewing the Profit and Loss statements on a weekly or monthly basis according to the business requirement.  These reviews will help in keeping track and making adjustments to business plans as and when needed.  Hiring an accountant to keep an eye on the key financial statements is another thing to be considered.

Attention should be drawn to the following while reviewing P&L statements:

  • If any increase in overheads such as rents, utilities, insurance etc., then look for a way to curtail expenses.
  • Increasing sales, but declining profits? This is the time to pause and look around for what is going wrong. Are the costs too high? Is there an issue with set margins?
  • Stationery sales (fixed amount of sales). Search for growth opportunities in a new markets or product lines.

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