Business Planning

Understanding profit and loss account statement

Understanding profit and loss account statement
Understanding Profit and Loss Account Statement

Understanding profit and loss account statement in addition to your balance sheet is a key part to running a successful business.

In order to know where your business is going financially, you need to know firstly whether you are making or losing money. Having a healthy bank balance is a good indication that you are making profits, but this may not always be the case.

Additionally, you need to understand where you are making money and on which products or services you supply, as it’s no good making good profits on one line, only to be making losses on another. Typically your profit and loss will measure how much money you have made or lost over a given period, which is usually over a month or 12 consolidated months over a year, also with comparative figures so you can compare periods.

What are you spending your money on? Look at both the current year and the comparative and review your expenditure. The profit and loss account is a useful tool for analytical purposes.

You also need to know where you are spending your money and what on and a profit and loss account will show this information.

The benefits of producing accurate and up to date financial information will allow you to know exactly how much money you are making (or losing) and it will allow you to begin to analyse where you could make yet more money, especially if you focus in on the 7 ways to grow your business.

The other reason to have accurate financial information is your bank manager, financiers and other interest parties will be able to see clearly how the business is doing. Your profit and loss account in conjunction with your balance sheet reports will provide sound business information for you and for them.

What are your metrics or KPIs? Your profit and loss not only measures your profitability, but it will also show you your margins, including your Gross Profit Margin and your Net Profit Margin.

Your profit and loss measures your business profitability while your balance sheet measures the businesses financial health. Using both these reports in conjunction with each other is important.

To prepare a profit and loss account and balance sheet you will need to invest in some accounting software, as a p & l and balance sheet reports are standard in most packages.

Contents of Profit and loss account
Contents of Profit and loss account

The above is an example shows the contents of a profit and loss account for 12 months with the penultimate month as the comparative, which is split between the top half of the P&L, which shows turnover (sales), less cost of sales and gross profit. Cost of sales is made up of those direct costs incurred in make the sales, so for example, if you are selling widgets at £100 each and they each cost £40 to buy, your cost of sales would be £40 and your gross profit would be £60 (i.e. £100 – £40 = £60), which would mean your gross profit margin is 60%.

Below the gross profit are listed your overhead expenses, which are summarised in the above example to headings of Wages & salaries, General Overheads, Financial overheads and Depreciation. Once the total of these are taken away from your gross profit you are left with net profit, or your profit before tax.

If you have your profit and loss account information, taking your profit with your sales data, together with a bit more information, using our , you will be able to work out the best way to grow your business.

As always thank you for taking the time to read my blog and if you like what you’ve read, please share it with others.