As a business owner, understanding your Profit & Loss Statement is greatly useful to monitor business activity. You P&L will help you identify where your business is succeeding and where is may be struggling. It can cover any period of time but is commonly viewed monthly, quarterly or annually.
Your profit and loss statement, also known as an income statement, will usually be split into 2 sections; revenue and expenses.
The revenue part of your P&L will show all income from your primary business activities like sales or products and services, secondary income like bank interest and lastly, any other financial gains, for example profit on sale of assets.
This simple addition of these figures will give you your total business income. As all income after your primary sales can be unpredictable, focusing on your primary income figures is key to grow your business.
Always look to maintain or increase revenues over time. A pattern of falling revenue may indicate that your business is in trouble.
The figures from cost of goods sold, for example labour and materials, plus your operating expenses will add to your total expenses. You should aim to minimise business costs wherever possible. You could source alternative suppliers, find more efficient methods, look at the cost of rent and more.
It’s also a good idea to check your profit and loss statement for any sudden or unexpected spikes in costs, rather than gradual increases over time (due to factors such as inflation and annual employee pay rises).
How to calculate profit
Use your profit and loss statement to extract important figures to explain your business’s profitability:
- Gross profit = Total revenue – Cost of goods sold
This is the difference between total sales and the cost of producing the goods or services you sell. This is an indicator of overall production efficiency and a key figure for setting prices and sales targets.
- Gross profit margin = (Gross profit ÷ Total revenue) x 100
This shows what proportion of gross profit you keep from each dollar of revenue generated (e.g. 20% gross profit margin means you keep a gross profit of $0.20 for every $1.00 of revenue generated).
- Operating profit = Gross profit – Operating expenses
This shows profit generated from core operations. It does not include expenses from interest or taxes (often called earnings before interest and tax, or EBIT).
- Net profit = Total revenue – (Costs of goods sold + Operating expenses)
This is also known as the ‘bottom line’—net profit is the total amount earned (or lost) after paying all expenses.
If you need help reviewing your businesses Profit & Loss Statement, the Piteo Accounting & Advisory team can help. Book and appointment today.
& Advisory team can help. Book and appointment today.