What does a Profit and Loss Statement tell you

By understanding what your Profit and Loss Statement is telling you, you are better able to understand your business and make the right decisions. Over the many years I have been a bookkeeper I have seen Small Business Owners turn their businesses around, from being a struggling business to a hugely profitable business, mainly due to the fact that they started understanding the Profit and Loss Statement and making decisions around what it was telling them.

Last week we looked at what goes into a profit and loss statement, if you haven’t read that blog yet, please go to – Understanding a Profit & Loss Statement will help you succeed in Business. This week we are looking at what your Profit and Loss Statement tells you exactly.

Why prepare a profit and loss statement?

A profit and loss statement enables you to:

  • Answer the question, “how much money am I making, if any?”
  • Compare your projected performance with actual performance – you do this by comparing your actual P&L against a Budget P&L
  • Compare your performance against industry benchmarks – the ATO have many industry benchmarks. Find yours and compare what your business is doing against others in your industry
  • Use past performance trends to form reasonable forecasts for the future – if you look back at what you did this time last year or the last few years, you will be able to forecast pretty accurately what is going to happen at the same time this year.
  • Show your business growth and financial health over time – comparing past periods to what you are currently doing is a great motivator if you can see that your sales are growing and so is your profit
  • Detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses – by checking your Profit and Loss Statement regularly you are able to identify any issues that come up and make changes quite fast so that you can prevent disaster
  • Provide proof of income if you need a loan or mortgage – when applying for finance you will need to supply a profit and loss statement to your financier.
  • Calculate your income and expenses when completing and submitting your tax return – your profit and loss statement is an important tool that is used when your accountant is submitting your tax return.

How to Calculate Profit

By using the Profit & Loss Statement you can extract several important figures to explain your business’s profitability.

Gross ProfitGross Profit is the difference between total sales and the cost of producing the goods or services you sell. Gross Profit = Income – Cost of Goods Sold.

You use the Gross Profit figures to see the overall efficiency of what you are producing and it is the main figure used for setting prices and sales targets. An example is:

Profit and Loss Statement

Local Business

For July 2014 to June 2015

Sales Revenue
Product/Service 1 100
Product/Service 2 1,000
Product/Service 3 200
Product/Service 4 2,000
Total Sales Revenue [J] 3,300
Cost of Sales
Product/Service 1 20
Product/Service 2 300
Product/Service 3 500
Product/Service 4 30
Total Cost of Sales [K] 850
Gross Profit [L=J-K] 2,450

Gross Profit MarginThe Gross Profit Margin shows you what proportion of gross profit you keep from each dollar of revenue generated. For example, if you have a 20% gross profit margin it means that you keep a gross profit of $0.20 for every $1.00 of income that is generated. Gross Profit Margin = (gross profit / revenue) x 100. Our example below shows that we receive 74c for every dollar that is sold

Profit and Loss Statement

Local Business

For July 2014 to June 2015

Sales Revenue
Product/Service 1 100 3.0%
Product/Service 2 1,000 30.3%
Product/Service 3 200 6.1%
Product/Service 4 2,000 60.6%
Total Sales Revenue [J] 3,300 100.0%
Cost of Sales
Product/Service 1 20 0.6%
Product/Service 2 300 9.1%
Product/Service 3 500 15.2%
Product/Service 4 30 0.9%
Total Cost of Sales [K] 850 25.8%
Gross Profit [L=J-K] 2,450 74.2%

Operating ProfitOperating profit is generated from core operations. It does not include expenses from interest or taxes, this is often called Earnings Before Interest and Tax or EBIT. Operating Profit = Gross Profit – Operating Expenses

Profit and Loss Statement

Local Business

For July 2014 to June 2015

Sales Revenue
Product/Service 1 100
Product/Service 2 1,000
Product/Service 3 200
Product/Service 4 2,000
Total Sales Revenue [J] 3,300
Cost of Sales
Product/Service 1 20
Product/Service 2 300
Product/Service 3 500
Product/Service 4 30
Total Cost of Sales [K] 850
Gross Profit [L=J-K] 2,450
Operating Expenses
Sales and Marketing
Advertising 10
Direct marketing 50
Other expenses (specify) 20
Other expenses (specify)  
Total Sales and Marketing Expenses [M] 80
Research and Development
Technology licenses 20
Patents 50
Other expenses (specify) 200
Other expenses (specify)  
Total Research and Development Expenses [N] 270
General and Administrative
Wages and salaries 300
Outside services 20
Supplies 50
Meals and entertainment 20
Rent 100
Telephone 80
Utilities 90
Depreciation 20
Insurance 30
Repairs and maintenance 50
Other expenses (specify) 40
Other expenses (specify)  
Total General and Administrative Expenses [O] 800
Total Operating Expenses [P=M+N+O] 1,150
Operating Profit(Loss) [Q=L-P] 1,300

Net ProfitNet Profit is the total amount earned (or lost) after paying all expenses. It can also be known as ‘the bottom line’. Net Profit = Operating Profit + Other Income – Other Expenses

Profit and Loss Statement

Local Business

For July 2014 to June 2015

Sales Revenue
Product/Service 1 100
Product/Service 2 1,000
Product/Service 3 200
Product/Service 4 2,000
Total Sales Revenue [J] 3,300
Cost of Sales
Product/Service 1 20
Product/Service 2 300
Product/Service 3 500
Product/Service 4 30
Total Cost of Sales [K] 850
Gross Profit [L=J-K] 2,450
Operating Expenses
Sales and Marketing
Advertising 10
Direct marketing 50
Other expenses (specify) 20
Other expenses (specify)  
Total Sales and Marketing Expenses [M] 80
Research and Development
Technology licenses 20
Patents 50
Other expenses (specify) 200
Other expenses (specify)  
Total Research and Development Expenses [N] 270
General and Administrative
Wages and salaries 300
Outside services 20
Supplies 50
Meals and entertainment 20
Rent 100
Telephone 80
Utilities 90
Depreciation 20
Insurance 30
Repairs and maintenance 50
Other expenses (specify) 40
Other expenses (specify)  
Total General and Administrative Expenses [O] 800
Total Operating Expenses [P=M+N+O] 1,150
Operating Profit(Loss) [Q=L-P] 1,300
Other Income [R]  
Interest Income 20
Profit on Sale of Motor Vehicle 1,000
Rent from Investment Properties 1,000
Total Income [R] 2,020
Other Expenses [S]
Interest Expenses 200
Loss on Sale of Motor Vehicle  
Expenses on Investment Properties 500
Other taxes (specify)  
Other taxes (specify)  
Total Taxes [S] 700
Net Profit [T=Q+R-S] 600

Now that you understand how a Profit and Loss Statement works, spend some time going over yours and see how you can improve your business. Leave a comment below if you would like to ask a question, or go to my ASK page and ask me a question there.



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