What is a Profit and Loss Report?
Just taking a note of your bank balance at the end of the month doesn’t tell the full story of how your business is progressing. If you’re using a computerised system, once you’ve completed all the bookkeeping and reconciled the bank account, it is easy to run a few reports to the last day of the month. You can then discover the financial position of your business as it stands at the end of the month; if you’re making a profit or a loss, see where you are doing well or not so well and plan improvements before something becomes a problem. Your accountant will be able to read even more into these reports and give advice on what you should be doing next.
A profit and loss report tells you if the business has made a profit or a loss! It involves slightly more than total income minus total expenditure.
Usually, in a computerised system, the figures are taken from the date the sales and purchase invoices were issued (accrual accounting), not the date of payment (cash accounting), and do not include VAT.
Note: You may be able to choose an option to show you the profit and loss on a cash accounting basis.
The gross profit (or loss) is the total income, such as sales and bank interest, minus the cost of sales, which are costs directly involved in the production of goods sold. The net profit (or loss), the final figure, is the gross profit minus all the expenses.
Once you have the P&L (profit and loss) report for the month, compare it with previous months and ask yourself questions, for example:
Are you making approximately the same profit each month?
Is your profit increasing each month?
If you’re making a loss each month, what can you do to decrease the loss and start making a profit?
Can you increase the sales or reduce the expenses?
To find out the profit or loss for the year to date, run off the report from the start of the financial year to the month end date. If you have reports for previous years to the same month, compare them and ask the same questions.
Look at your P&L report in detail every month.
Look for trends in your business so that you can make secure financial decisions to grow your business.
Investigate anything that goes against previous trends or seems ‘not quite right’.
- Calculating your profit and loss involves more than total income minus total expenditure
- Computerised systems typically use the date invoices were issued, not paid and don’t include VAT
- Comparing monthly profit and loss reports can reveal trends
- This can help inform your forward planning or alert you to irregularities
Apr 19, 2015