Your profit and loss figures identify your sales, expenses and the resulting profit or loss. This information is vital as a financial overview of the viability of the business and as a basis for calculating your tax liability.
However, this figure does not detail actual production unit costs. The income statement does not provide a basis to determine what profit would be if sales were increased. You cannot project a profit from the income statement alone because there are certain expenses that would stay the same, no matter your sales numbers, and certain expenses that would increase or decrease. In addition, the income statement does not provide information relating to the number of units sold.
In order to project increased sales and profits, you must break down the sales and expenses into a different format, re-categorizing your expenses into variable and fixed costs and create a cost accounting report.
It’s not as tough as it sounds and it’s a necessary business tool for entrepreneurs.
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