Operating statements: Overview, definition, and example
What are operating statements?
Operating statements, also known as income statements, profit and loss (P&L) statements, or statements of operations, are financial reports that summarize a company’s revenues, expenses, and profits over a specific period of time. They provide an overview of a company’s financial performance, detailing how revenue is earned and how costs are incurred in the process of running the business. Operating statements typically cover periods such as a month, quarter, or year and are used by business owners, investors, and other stakeholders to assess profitability, operational efficiency, and overall financial health.
For example, an operating statement will show how much a company earned from sales, how much it spent on production, and the resulting profit or loss during a given time frame.
Why are operating statements important?
Operating statements are important because they offer insight into a company’s financial performance, helping stakeholders understand how well the business is operating. These statements are crucial for assessing profitability, monitoring expense management, and identifying areas for improvement. They also serve as a key tool for decision-making and planning, both internally within the business and externally for investors, creditors, and regulators.
For investors, an operating statement is a critical document for evaluating the company’s ability to generate profits and manage expenses. For business owners and managers, it helps track performance, manage costs, and make informed strategic decisions. Lenders also use operating statements to assess a company's ability to repay loans and maintain financial stability.
Understanding operating statements through an example
Imagine a company, XYZ Corp., that produces and sells office supplies. The operating statement for the company over a one-month period might show the following:
- Revenue: $100,000 (from sales of office supplies)
- Cost of Goods Sold (COGS): $50,000 (cost to produce the office supplies)
- Operating Expenses: $30,000 (salaries, rent, utilities, etc.)
- Net Income: $20,000 (revenue minus expenses and costs)
In this example, XYZ Corp. earned $100,000 from sales, spent $50,000 on production costs, and had $30,000 in operating expenses, resulting in a profit of $20,000 for the month. This operating statement provides a clear picture of the company’s financial performance for the period.
In another example, a restaurant might have an operating statement that shows the total revenue from food and beverage sales, minus the costs of ingredients, labor, and overhead expenses, to calculate the restaurant's net income or loss for the month.
An example of an "operating statement" clause
Here’s how an operating statement clause might appear in a financial agreement or corporate document:
“The Company shall prepare and submit an operating statement for each fiscal quarter, detailing all revenue, expenses, and profits or losses incurred during the period. The operating statement will be provided to the Board of Directors no later than 15 days after the end of each fiscal quarter, in accordance with generally accepted accounting principles (GAAP).”
Conclusion
Operating statements are essential financial documents that summarize a company’s revenue, expenses, and profits or losses over a specific time period. They provide valuable insights into the financial performance of a business and are key for evaluating profitability, cost management, and financial health. Whether for internal decision-making or external evaluation by investors or lenders, operating statements are an essential tool for managing and understanding a company’s financial situation.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.