As a business owner, understanding what is in your Profit and Loss is fundamental in growing a great business. This video discusses what I like to see in a Profit and Loss for a small business.
Your Profit & Loss Statement
Today I want to talk about how to read a profit and loss statement out of your accounting program, like Xero or QuickBooks. What I’ve found is that business owners, without a great understanding, or in depth understanding of what’s in their profit and loss, they have difficulty in making great decisions in their business about spending money in certain areas or where to take it to.
I’m going to look at a real life, Xero profit and loss statement, and talk you through exactly the things that I would expect in that statement and how you can maybe adjust the one you have in your business to get some more information out of it, to help you make great sort of management decisions. So let’s jump onto my computer, and we’ll have a quick look.
Looking at a P & L containing historical information. We’re looking at previous months here, and I guess this is the first thing to point out is I like to see the break up on a monthly basis here. For example, we’re in October here and we can look at the previous months, September, August, and July, and most accounting packages will split it up into months for you, but I think this is really important as a management tool, you need to look at your P and L every month.
Some businesses are hooked on just looking at annual P & Ls from their accountant, but a monthly summary is something that is really, really useful. And another key feature or the main key features of the P & L is obviously we’re showing our income here, having cost of sales and expenses with the profit at the bottom.
Carving Up Your Income
And so let’s dig into each of these sections and cover off a couple of things that are what I would like to see in most businesses in each of their sections here. So income, this is all the income that comes into the business and it could be mistaken. This business here is largely, all the income is thrown into virtually one bucket here, but it’s good to be able to split it up into several buckets. If you’ve got a business that does installation and service, for example, you might want to put at least two.
Even better, if you’ve got certain regions or multiple core services, you can actually record your sales, you might have sales for excavations and sales for roofing and sales for Melbourne work, so you can start to understand exactly where the work is. So that’s a great thing to see in my view.
Analysing Costs
Now, in terms of being able to derive that sale or deliver that good or service, there’s going to be some costs involved. The cost of sales are usually the material and labor to deliver that job. So materials, for example, in say a business site might be flooring materials. Without that material, you can’t deliver that job. Subcontractors are usually under cost sales if they are an installer, for example. But also all of the guys or employees in your business that actually work on the job to deliver that job, their salaries and wages are a core part of that too.
Not all wages are a part of cost of sales. And quite often they’re put down here in expenses, but it’s a much better way for on the job guys to put them up here in cost of sales.
If they happen to be a admin person or a salesperson or general manager, they’re not used to deliver the job, so they would be down here in wages under expenses.
Operating Expenses
These expenses are typically things like power, heating, postage, rent, motor vehicle expenses anything that incurs a cost that you have to pay out, even if the job is not going ahead. So if you don’t have any work for a week, you might put your guys off and tell them to go and have a holiday, but these are things you’re going to have to pay.
I think that pretty much covers off the fundamentals of a P & L. So I’m hoping that what I’ve just gone through on the screen here has helped you have a greater understanding of what’s in your profit and loss. If you have any questions, don’t hesitate to call me, and keep your eye out for other videos that I’ve got along these lines, I’ve got one on balance sheet and break even coming up as well, which go hand in hand with the profit and loss video. And the best way to get that is by subscribing to my channel, so you can see all the videos coming up.
