Profit and Loss 101: Do you really understand your P & L?
An income statement, commonly known as a Profit and Loss statement or your P & L ,is a critical tool that you should understand as a business owner.
It answers the most important question’s:
- Is your company profitable?
- Is it running efficiently?
- What opportunities are there in identifying areas to focus on i.e. opportunities for increasing income and/or decreasing costs?
- Are you paying too much in wages?
Naturally, when you work closely with your BAS Agent, you have the peace of mind knowing that this is created accurately, however, as a business owner, it is also useful to know how to interpret this fundamental statement.
My aim to provide an overview of what a Profit and Loss is and how that data can be utilized to make better business decisions.
What is a PROFIT AND LOSS (P & L) STATEMENT?
A Profit and Loss is most commonly generated monthly, quarterly, and annually, and it provides a working picture of a business’ Income, cost of sales, business expenses over those periods of time.
The report’s most important line is, of course, the ‘bottom line’. It provides an instant view if the company has made a profit or a loss. This can then be compared with previous time periods to compare the increase or otherwise of the Net Profit.
This makes the report valuable to lenders, investors, and shareholders and in particular to you the business owner.
The report holds a couple of lines that provide breakdowns for;
1) Gross Profit = Total Income less Cost of Sales
2) Net Earnings = Gross Profit less total business Expenses
You want to MAKE SMARTER BUSINESS DECISIONS
As with any data or financial statement, your Profit & Loss is only useful if you actually use it. There are a multitude of ways that your Profit and Loss statement can determine areas and opportunities for growth and change.
Here are a few of the most common ones:
- Deciding whether to hire or downsize
- Determining which growth opportunities to focus on
- Uncovering which products or services are generating or losing you money
- Deciding where to cut operational costs
- Re-evaluating your pricing strategy
To gain more clarity and filter your numbers, I would recommend tailoring your accounts in your Chart of Accounts to suit your business. This will give you answers as to where your Income is being made, how high are your cost of sales and how high are your business expenses.
See example below of a tailored Profit and Loss as in Income, Cost of Sales and business expenses are visible straight away.
What to do with YOUR PROFIT AND LOSS STATEMENT
Your Profit and Loss is focused on examining the actual operational efficiency of your company by assessing profit margins in the outset.
Some of the lingo can be daunting when you’re not using it each day.
So let’s start with the definitions.
- Gross margin is money left after subtracting the cost of the goods or services sold from the net sales and can be a dollar value (gross profit) or a percentage value.
- Net sales are the total value of sales for a given period and less any discounts given to customers.
- Net margin is your profit before you pay any tax (tax is not included because tax rates and tax liabilities vary from business to business).
- Net margin is your gross margin less your business overhead expenses
When looking at the P & L you can analyse the previous period and the previous year to identify how your business is tracking. If your running projects or jobs in your QuickBooks accounts we can also run a Profit and Loss by Job.
This can help you to invest in the areas that will grow your business and address any elements that need improved.
As a business owner the P & L is also required for tax preparation and loan applications, and your loan broker or financial advisors will need it to make recommendations for your business.
Every business owner should know how to analyse the business income statement.
Even from a very high level, to know your business is on track.
The statement not only reveals the health of your income, cost of sales, and associated business expenses – it also provides you a much needed context for how those change over time. try running the Proft and Loss by Month, gives you a great indication on how your tracking each month and which month is your busiest months.
Check out Business Victoria on how to calculate your breakeven point: https://business.vic.gov.au/business-information/finance/pricing-for-profit/calculate-your-breakeven-point-margin-and-markup
For Support from Lauretta: https://www.qbbs.com.au/quickbooks-support-and-quickbooks-help/
Health review on your QuickBooks accounts: https://www.qbbs.com.au/health-review/