You may have seen your profit and loss statement (P&L), sometimes called an income statement, but do you know how to gain the most out of it?
In essence, your P&L main purpose is to list your income and expenses over a set period. In your annual accounts this will cover a 12-month period, however you can run a P&L for shorter periods using your accounts software.
The P&L is split into 2 main sections:
Income or Revenue
The section comprises all your income from your main business activities, such as sales of goods sold, or service rendered. Other income such as interest received, capital gains or secondary business income is also shown under this section.
Expenses
The expenses section is generally divided into two sections: direct costs, or cost of sales, and general expenses. Cost of sales are all costs related to the production of goods for sale or any provisions needed for services rendered.
The remaining expenses, such as rent, utilities or bank fees, are shown under overhead expenses. As these don’t directly relate to the goods or services you provide, they are separated out from your cost of sale expenses.
Keep in mind that no two businesses are the same, an expense that may be classed as a cost of sale in one business may not be classified the same way in another. Always keep in mind what goods and services your business provides when allocating expenses.
At the end of your P&L you will find the “bottom line”, a term meaning the total profit or loss your company has made. This is made up of your total income less your total expenses and results in your net profit, the “bottom line”. Just keep in mind that this is just your profit on paper and doesn’t necessarily give a true financial picture of your business. For this you will need to look at various reports in combination.
If you’d like further information on how to best utilise your profit and loss statement, get in touch with us.
