What Is A Profit And Loss Statement?
The Profit & Loss Statement is amongst the most important and frequently used financial statements in business decision making.
The basic purpose of making a Profit & Loss Statement is to determine how the business has performed its operations. This statement usually is made for a certain period.
A Profit & Loss Statement is generally broken into three main areas: sales, costs, and expenses; each of which is sub-totalled as you work your way down the page. The report will also contain your gross profit and your operating profit.
Sales figures or income
If you invoice your customers, by default the figures in the Profit & Loss Statement will be reported on an accrual basis, meaning the report covers what you’ve invoiced, not what you’ve collected.
However, most accounting systems will also allow you to run a Profit & Loss Statement on a cash basis when required.
Note that these figures are always exclusive of GST because GST is never your money, it’s just a tax you’re collecting on behalf of the government.
Cost of goods sold (COGS) or direct costs
These are the costs that vary directly with your sales. For example, if you sell 10 new computers to a client for $1,200 each (excluding GST) your sales income would be $12,000. If those computers had cost you $700 each, your COGS would be $7,000.
If you sell services rather than goods, your direct costs will include your wages, salaries or subcontractor expenses for the period.
These are the items that typically don’t vary as sales vary, and include rent, marketing expenses, insurances, admin salaries and so on.
I see many P&L’s where the expenses are listed in alphabetical order, but I strongly recommend creating some subtotals so you can see totals by each type of expense. For example, total salaries and related costs such as super, training costs, workers compensation and payroll tax.
Having these subtotals will help you see the big picture, rather than just worrying about the detail.
Why Complete a Profit and Loss Statement?
The primary incentive to create a profit and loss statement is managing the business budget and tracking income compared to expenditures.
The regular production of a profit and loss statement enables a company to accomplish a number of different tasks with a single document. A regular profit and loss statement enables a business to:
- Identify how much money is being made on a regular basis.
- Make a comparison between projected performance and actual performance.
- Compare your actual performance to the benchmarks in the industry.
- Use relevant calculations to make forecasts for future performance.
- Identify business growth and financial health over time.
- Detect issues with sales, margins, and expenses and correct them within a feasible amount of time.
- Provide an accurate proof of income a needed for loan documentation or other sources.
- Calculate the income and expenses for submission to tax return.
A profit and loss statement is an invaluable tool for any business, and helps reflect the performance of a business over a specified period of time.
It also helps determine any areas of strength or weakness and can help the small business owner ameliorate specific financial issues to improve overall performance and success.