The Difference Between a Profit and Loss Statement and a Budget
In modern economies, corporate management often deals with weighty topics -- too few investment opportunities, too little money and too much competition. To make sure their commercial strategies bear fruit, senior executives draw up adequate operating blueprints. They also pay attention to financial statements, including budget reports and statements of profit and loss.
Investors considering long-term bets usually pay attention to a company’s profit and loss statement, also called a P&L or an income statement. This accounting report reassures security-exchange players that the firm is financially sound. Investment bankers also heed clients’ P&Ls when preparing essential documents for an initial public filing, including accounting data summaries, regulatory filings and tombstones. These are forms in which investment bankers provide key data about a stock’s public offering, highlighting the banks involved in the deal and number of shares offered. An income statement includes revenues, expenses and net income -- or net loss, if operating charges exceed revenues.
Discussing how to prepare the corporate P&L and ensure its accuracy is a collective effort. It is hardly a taboo topic, a subject that only department heads and segment chiefs grapple with. Rank-and-file personnel, especially bookkeepers and accountants, weigh in on these discussions because they ultimately are the ones implementing top leadership’s recommendations. Accurately preparing a P&L starts with correctly recording transactions -- that is, posting journal entries by debiting and crediting the appropriate accounts. It also involves reviewing a trial balance to ensure accuracy of debits and credits. Income statement preparation often calls for analytical dexterity and an ability to abide by regulatory guidelines, especially generally accepted accounting principles.
In the global marketplace, a company may respond to lingering cost overruns and inefficient processes by creating a whole new operation from scratch. This is often useful if management believes current segment chiefs are not doing a good job implementing corporate guidelines in their respective business units. Budgeting offers corporate leadership the opportunity to rein in waste and control expenses, all while avoiding the high costs that often come with establishing new operations. A budget is a financial worksheet in which company principals set spending limits that department heads and production supervisors must follow.
Budgeting helps corporate management put expense-control policies into place, preventing personnel from working the system to their advantages. Without adequate budgeting controls, a firm could incur substantial losses, especially if department heads do not monitor operating expenditures.
Corporate leadership reviews income statements and budgets to make sense of factors affecting profitability and solvency. Although both documents are distinct, department heads use them concurrently when charting annual operating strategies. This is because income-statement items, such as revenues and costs, are also budget components.