Do you understand your Profit & Loss?

Starting a business and running it successfully is challenging. If you don’t have a background in Accounting, it can be very difficult to understand the terminology. Let me break down the Profit and Loss Statements for you…

The Profit & Loss Statement (also called known as an Income and Expense Statement) lists all the income and expenses you have had for the month/year leaving you with a Net Profit or Loss.

If you are using an accounting package this will automatically calculate be calculated for you BUT it is important that the person entering in the data does it accurately and in a timely fashion. You must make sure that you collect ALL the documentation (invoices) – no matter how big or small.

Your profit and loss statement lets you know how profitable your company is over a period of time and it is important to make sure you have all your invoices entered for both sale and expenses.

I’m sure as a small or medium business owner you have a number of responsibilities on your to-do -list, but checking your Profit & Loss each month is a must. 

What is listed in a Profit and Loss Statement?

• Revenue: This is the total of money you have received (in a certain period) by selling products/services and any other income for the business
• Cost of Goods Sold (COGS): The cost of manufacturing the product ie if you make cakes you would include flour, eggs etc
• Gross Profit: Revenue Less Cost of Goods Sold (COGS)
• Expenditure: This is the sum of ALL the expenses for the business (not including COGS) (in a certain period)
• Net Profit: This is your revenue less COGS minus expenses 

Reasons for reviewing and updating your Profit & Loss Statement

1. Improve your Net Profit: by reviewing your profit and loss each month you can see how your business is performing. This is where you can make decisions on how to improve income or cut costs if needed.
2. Tax Returns: If you use a Tax Accountant you will need to provide a Profit and Loss Statement so they can prepare your return, unless you’re particularly savvy and like doing it yourself. The Profit and Loss Statement breaks down all the information making it easier to lodge for both parties
3. Business Loans: If you need a loan from the bank you will most likely need to provide a Profit and Loss Statement as well as other financial reports to prove profit in your business.

Keeping track of your business financial performance is critical to its long term success and it is a valuable tool for you. Just remember if you are feeling overwhelmed you can hire a professional accountant to help.