As a small business owner, you are always told ‘know your numbers’. But where do you start?
Simple answer: with your ‘Profit and Loss’ report, sometimes known as an ‘income statement’. Here are our practical tips around this key report that will really help you to understand your business.
In this blog, you’ll discover:
- How to find your Profit & Loss (P&L) report
- What a P&L report is
- What it tells you
- What WON’T be on your P&L report that is important
Let’s jump right in.
How to find your Profit & Loss report
For many business owners this will be the first issue – have I got one and where on earth can I find it? There are two places to look first:
1) If you are a limited company and have submitted at least one set of year end accounts, you will have a P&L report to view. Just be aware that it could be quite old, depending when you submitted your accounts.
2) If you use ‘cloud’ accounting software, such as Xero or QuickBooks, you will be able to find an up-to-date Profit and Loss report via the ‘Reports’ menu. These “live” figures are one of the great benefits of accounting apps –presuming your book-keeping is up to date of course!
3) If you are a sole trader, you might not have a P&L report to view if:
- You submit your tax return yourself or
- Your accountant doesn’t supply you with accounts
In either case, you need to think about creating a Profit and Loss report moving forward. Xero or QuickBooks could be your first port of call and remember, you can use these apps and still keep your accountant!
What is a Profit & Loss report?
It may sound grand, but it’s actually just a report that shows your business’s incomings and outgoings (revenue and expenditure). What you want to see at the end of the report is a positive number (a profit!) rather than a negative figure (a loss!).
Your P&L report will cover a certain period of time, such as the last 12 months. The time period is usually mentioned on the report, and in software programs you can adjust this to see the time period you wish.
What a P&L report looks like.
Here’s an example P&L we’ve made for a fictitious company. There are some keys things that you may consider ‘outgoings’ that do not appear on this report –we’ll explain these in more detail. For the meantime, just admire the easy-to-read format and balanced elegance of the figures (OK, that’s just us then!).
What does your Profit & Loss report tell you about your business?
So, what is the key information that your Profit and Loss report shows you? It shows you your business’s financial health in terms of ‘Does it make money on paper?’.
It does this by helping you:
- Understand how much money is coming in (revenue)
- Identify cost-saving opportunities by giving you an awareness of what’s going out
- Assess the overall profitability of your business
Ultimately, as a small business owner, it’s going to give you an indication of what money “on paper” is left for you as the owner. That “on paper” bit is important; this is about bringing together costs and income, and not just the money in bank balances.
The three key areas on a P&L report
Your report has three key areas, often under these headings:
These are your ‘sales’
- Direct Costs (sometimes known as Cost of Goods/Sales)
This should be the ‘direct’ cost of the services or products you sell, outside of your overheads. For example, if you make and sell a product, you’d see the cost of the materials and postage/carriage costs to deliver them to customers.
- Overheads (sometimes known as operating or admin expenses)
This is the area where all your other costs sit. These are usually items like rent, telephone, advertising, etc.
What’s NOT in a Profit and Loss report
It’s very easy to look at the bottom of your profit and loss report and think, ‘Wow, that’s a good profit!’. Before you congratulate yourself too much though, there are some key things MISSING from the profit and loss report that you really need to consider.
Four key things NOT shown in a P&L report are:
- Investments in assets and equipment
- If you are a limited company, the owner’s dividends are not shown
- If you are a self-employed business owner, your own ‘wages’ will not be shown
- If you are repaying loans, those amounts will not be reflected here
So where are they? All of these sit on the P&L’s sister-document, the Balance Sheet. (Check out our previous article on the Balance Sheet here).
To get you a much better feel for how healthy your business actually is, you need to take into account these other ‘costs’.
Taking action using your P&L report
Now you know a little more about Profit and Loss reports, what are you going to do with this knowledge? Here are your 4 key action points:
- Ensure you have access to an accurate and (preferably) up to date Profit & Loss report
- Learn and understand your numbers by reviewing how much is in each column. Look particularly at your income and expenses
- Review the profit, after taking into consideration investments, loan repayments etc. How does this compare this to what you are drawing out of the business and does this figure cover it? If not, it’s likely you are drawing too much from the business
- Consider whether you are making as much money as you’d hoped! You can read more about how to do this in our blog on the subject.
I’m still confused about profit and loss in general
If you are still unsure what conclusion to draw from your P&L report, ask your accountant or book a consultation with us. To make access to information both bespoke and affordable for everyone, we offer a paid 1 hour, 1-2-1 consultation so you can ask simple questions of our team of accountants. You don’t have to sign up as a client, so it’s an easy and cost-effective way for you to get the help you need, when you need it.