This blog post is part 2 in a 3 part series exploring financial statements. For part 1, click here https://art-space.ca/how-to-read-financial-statements-part-1-basic-profit-loss-2/.
How to Read Financial Statements (Part 2 – Complex Profit & Loss)
If you’re just joining us, we’re all sitting at board meeting going over the latest financial statements that were just handed out by the treasurer. We think we’ve got the basic idea of a Profit & Loss statement, that it tells us how much we earned and how much it cost to earn it, but geez there are a lot of numbers on this sheet of paper.
It looks something like this:
You still have your revenues at the top and your expenses at the bottom, with the overall profit or loss at the very bottom (here it is called Net Income, same diff.)
But now we have all these extra columns to deal with. Yoiks!
- The first column, Apr 2015 Actuals, are the revenues and expenses we actually incurred in the month of April.
- The second column is our budget for April, i.e. what we thought was going to happen in the month.
- The third is what actually happened during the year so far. In the sample above, the fiscal year starts on September 1, so this column includes all transactions between September 1 and April 30.
- The fourth column is what we budgeted, or thought would happen, from September 1 to April 30.
- And the last column, is the budget for the whole year.
Ack! Why do we need all this?
Short answer: So we can make decisions about where our organization is going.
By comparing the actuals with the budgeted amount, we can see if we are on track for the month, the year so far, or the whole year.
In the sample above, the actual revenues for the month of April were more than $85,000, which is higher than the April budgeted revenues of $56,000. Curious. I wonder why? So I raise my hand (yes I’m goofy that way, and ask Jane our trusty treasurer, “So why are our revenues so high this month?” And Jane replies, “Because we rocked our last fundraiser and brought in $15,000 more in donations, and we got $10,000 more from a new grant.” Aren’t we awesome!
But wait. We can also see in the P&L that our actual expenses were much higher than our budgeted amount. $72,000 actual expenses compared to $59,000 budgeted expenses. What’s going on here? Why are we so far off from our budget? Has something gone wrong with our program? Did something unexpected happen in April? Or were we really off the mark when we did up our budget? “And are the higher expenses this month to do with the fundraiser too,” you ask?
“Well, no,” Jane replies. “That’s because we underestimated the cost of the new wiring we installed for the multi-media exhibit. We had to upgrade the power supply thingy to run the extra lighting.”
Ok. So now we’ve learned three things about our organization from reading the P&L.
- We are rock stars at fundraising.
- We’ve found a new grant that we can tap into for future years
- We need to factor in a bigger budget for exhibits that require special lighting or electronics.
If you look at the year-to-date columns and compare them to the whole budget for the year, we’ll likely come up with more questions.
The answers to these questions help us make decisions about the rest of this year and the coming years as well. In the end, your P&L is a decision-making tool.
The one thing the P&L doesn’t tell you, though, is how much money is in the bank. That’s because the cheques you wrote for those expenses may not have been cashed yet, and the revenues you invoiced for may not have come in yet. That’s where the balance sheet comes in.