A Profit & Loss statement, also known as P&L statement or income statement is one of the most crucial yardsticks by which a lender estimates the eligibility of a borrower. This is a decisive analytical tool that shows a business’s financial health over a certain period of time. Every business generates a P&L statement, but not every SME utilises it effectively to enhance its chances of getting an SME loan.
Let’s learn a bit more about the P&L statement and business loan eligibility.
As its name suggests, your P&L statement is a concise representation of the profit and losses of your business during a certain time period. It shows the revenue (profit) of your business after taking into account expenses incurred (raw material, depreciation, etc.). Additionally, the P&L statement also tells, at a glance, how much money is in your business to pay salaries, to invest towards your growth, to pay off debts and to hire new employees.
A P&L statement is your financial health report card and it is what a lender will look at before approving any business funding.
Are you using the latest technology?
There are countless tools that you can use to make generating a P&L statement easier. Are you taking advantage of them? You can download templates that will take the hassle away as they can perform all the necessary calculations to help forecast net profit. You can also rely on cloud accounting tools to streamline the process and to generate an accurate report. Here, data is fed in automatically and this eradicates the need of separate data entry, synchronization and maintenance.
Start by getting your business plan in place
With a P&L statement you are in a better place to make a robust business plan. You will be better equipped to make projections for future profits and losses. A potential lender needs to see how well you’ve planned your goals and how you intend to achieve those numbers with the business funding that you’ve applied for. Make a plan for at least 3 years as it demonstrates your understanding of how the external financing will impact profits and losses. Make monthly projections for the first year, and you can have quarterly targets for the remaining time.
What is your profitability target?
This is again where your P&L statement can come to your aid. Decide on a profit you wish to achieve in the next month or quarter. Your P&L statement will help you track past performances and gain insights, which can be used to make projections for the future. By referring to your P&L statement, you can gauge – If sales were not good in the previous month, what can you do to increase revenue? Are you spending more than you planned? Where can you cut down your expenses to meet your profitability target?
You must review your P&L statement as frequently as every month if not more often. An ideal scenario is where you check the numbers every week to ensure your plans are on track. If not, it is easier to make smaller corrections to your business course before things get too out of hand. You might even consider hiring an accountant to focus on your finances while you concentrate on running your business. The costs will be negligible compared to the numerous benefits that you will reap.
Your business loan eligibility rides on how diligently you focus on the P&L statement. It’s something that could use your attention.