Most people start their business because they are passionate about the primary work of the business — which usually is not accounting. This means that most business people aren’t completely aware of how to interpret the monthly financial reports they receive.
For business owners, the Profit & Loss Report, and other financial reports can highlight where their business is succeeding and where it is struggling. Investors will use P&L reports to gauge the financial health of a potential investment, or loan serviceability.
A Profit & Loss Report shows you all the income and expenses of your business over a period of time, and is an indicator as to your businesses performance and long-term viability.
All Profit & Loss Reports (or P&L’s) are based on a very simple formula…
Sales – Costs = Profit
It really is that simple.
Income (Sales) is money you bring IN to the business, and may be broken into different sources eg: online sale & retail sales, or product groups
Expenses is all the money you spend in running the business, and they are usually broken into sub groups eg: materials, labour, office costs, factory costs
Cost of Goods Sold (COGS) are Cost directly relating to your product or service sales because they can be tied directly to the production of your item. Eg: inventory
Sales – COGS = Gross Profit
Gross Profit is your business’s profit before subtracting business expenses. How much your sales are directly costing you.
Sales – COGS – Expenses = Nett Profit
Nett Profit is your sales less all the expenses you have to pay to operate your whole business including staff, office, financial, and production costs
If you have not been receiving your P&L’s or have been filing them away without reading them, you are not alone. However, understanding your P&L is essential to understanding Cash Flow which in turn is essential to being able to run your business successfully
If you would like help with your Profit & Loss Report, or any bookkeeping matter please contact us