Your profit and loss statement (P&L) helps you understand your business performance and profitability over time.
The profit and loss statement has two main sections: income and expenses
These may be further subdivided depending on the complexity of the business and reporting requirements.
- Income or Revenue
Income primarily includes main business activities such as sale of goods or services. For hospitality, you may want to split it between Sale of Food, Sale of Beverage or even Sales Promotional Package for any special events you hold on a regular basis.
- Expenses
Expenses are usually divided into two sections: direct costs, or cost of goods sold, and expenses. Cost of goods are those that are directly linked to the provision of services or sale of goods. For example, cost of goods sold (food), cost of goods sold (alcohol) - not only will this seperation help distinguish expense incurred for each category, it also makes it easier when processing invoices because most of the cost of sales (food) will be GST - Free.
Other types of direct costs might be importing and freight costs, contractor costs or certain equipment. Some direct costs are fixed, that is, they are the same from month to month, or they could be a fixed percentage of sales; others vary in value but are still related to the income producing activities.
Overhead expenses are all the other expenses required to run the business, regardless of the level of income: for example, rent, utilities, bank fees, bookkeeping fees, professional development costs, vehicle costs and staff costs. Many of these costs form the basis of working out your break-even point, or how much it costs just to open the doors for business.
There are some expenses which may be reported as a direct cost in one business but an indirect cost in another type of business, for example, merchant fees or contractor costs.
The Bottom Line
Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line’. Often business owners are just interested in looking at the bottom line, but a true financial picture requires an understanding of several reports and an ability to see the big picture that the reports are illustrating.
The P&L is a vital tool to analyse for trends over time and to make strategic plans for benchmarking and growing your business.
- What does your P&L tell you about relationships and ratios between sales and expenses, seasonal changes and annual trends?
- Have all your direct costs been allocated correctly?
- Have you recouped all billable expenses from customers?
Financial statements help you understand the big picture for your business. With deeper understanding of your business operations and performance you can make informed decisions about your business finances.
Book a session today to examine your financial reports with our experienced business advisors.
