All You Need To Know About Your Profit And Loss Account (August 2020)
Updated: Oct 16
Statistically speaking, your business is much more likely to succeed if you keep on top of your finances. Understanding your tax bill, keeping up on your credit control and being able to talk to investors or banks about your businesses financial potential are only some of the advantages.
How many entrepreneurs do you know who used to think their business was doing “well” until they spoke to their accountant? Or who suddenly run out of money and go bust with seemingly no warning at all? These are all common, but easily avoidable.
The first, most paramount report you should get to know and fully understand is your profit and loss. Luckily, this report is (arguably) the easiest report to learn as well.
In this article I will outline all you need to know about your profit and loss to have a basic understanding. Please remember, each business is unique, and each country/state/province is unique when it comes to tax laws, so always consult an accountant before making big business decisions based off of this information.
The first section of your P&L is the most fun, and (hopefully) the largest. This is your sales revenue. Some companies like to keep all sales within the one nominal, but you can have fun with this and separate your income streams into locations, products, services, or however your business works. This will all be considered revenue in terms of the tax laws.
** Note, if you are in the UK and VAT registered (Check out whether or not you should be, here), then different types of sales may or may not be VAT sales. Look into this and it may help to keep these in separate lines as well. Your revenue is anything that comes into your company from customers. This does not include:
• Money sent to your company as a loan
• Profit gained on the sale of an asset • Money you send in to fund your company
Tally this up monthly, and you have your monthly revenue figure.
Cost of Goods Sold
The second section of your P&L is your cost of good sold. Depending on your location and business structure, this will have different tax deductions.
To decide what goes in here, you’ll have to think about your products or services you provide. A cost of good sold is anything that is DIRECTLY related to output. The simplest way to think about this is to see if the cost of this expense changes depending on how much you produce. For example, if you rent an office space, it doesn’t matter if you sell 1 or 1000 products, the rent will be the same. Alternatively, if you sell cookies, the cost of batter will directly change depending on the amount of cookies you bake.
The final, and often largest part of your profit and loss will be every other expense you incur. Think bank charges, car loan repayments, and electricity bills and wages. Again, this changes business to business, and depending on your business structure and location, each nominal will have different tax deductibility’s, but as a general rule, if this money is spent to keep your business running, but is not a direct cost to your product and service, it goes here.
There are many ways to see how well your business is doing, but here a few quick calculations to help you determine your profitability based solely on your profit and loss report.
To determine your gross profit, simple deduct your cost of goods sold from your revenue figure. This will allow you to see how much of a margin you are making on your products/services. For example, in the month of January you make £1000. To do this, it costs you £800 in direct costs. This gives you only £200 to pay for the rest of your expenses. However, if you make the same £1000, but it only costs you £300 in direct costs, you have £700 to spend before you’re making a loss.
Take a quick look at your industries averages. Some industry’s have high direct costs as a standard, others have barely any. Another quick, but important, figure to calculate if your net profit. This figure will give you a good idea of how much corporate tax you’re going to end up paying. To do this, simple take your revenue figure, and subtract both your costs of goods sold and your operating costs. Ideally, this number is positive, but more often than not in the first year of business this figure may be negative (indicating a loss).
Want to know more about your specific profit and loss account? Contact us for a custom quote to audit your books and set you on the path to success.