If you are reading this article you most probably didn’t start your business to offer accounting and financial services. As such, you will not want to focus your attention on accounting and finance and will benefit from The Tax Shop where all your financial & accounting needs are addressed in a timely, affordable and professional manner. Indeed, the three areas of business in which small- and medium-sized businesses benefit from outsourcing are:
We understand that you will still benefit from a basic overview of the profit & loss statement to get you started and accordingly share tips regarding the P&L statement to help you manage the tedious task of accounting more efficiently.
Understanding the Profit & Loss Statement
Many entrepreneurs don’t use their profit & loss statements effectively simply because they find such too complicated for easy interpretation. However, a basic understanding of the P& L statement will help to understand what capital is available and to determine the profitability of the business.
The basic formula behind the statement is rather straightforward and entails only the sales or earnings minus the expenses, which will give you the profit amount. The rest is about breaking down the sales and expenses into sub-categories and their sub-totals.
Indicate the sales/earnings at the top of the statement with the expenses below such and the profit right at the end. As you browse down the P&L you will see sub-totals in the columns and right at the bottom you will see the profits after all the expenses have been subtracted from the sales/earnings/income.
Note that you can use sales, earnings, revenue or income for all the money that comes in and expenses or costs for the cost of purchase and can substitute the word profit with Net income. Another way to refer to the profit and loss statement is to call it by the simpler term of income and expense statement, or simply income statement.
Sales or income can be divided into various categories. If it is for instance, a restaurant you will have sales in the restaurant, take-away meals and perhaps even catering. You will thus have three categories for income. Your expenses can be broken up to indicate the labour, materials, food stuffs, beverages, and more. All the income is added up to get to the total income and all the expenses are added to get to the total costs.
Tip: sub-divide the expenses into the expenses related to direct delivering of the product and the costs that are indirect. If you operate in the service industry the cost of product will be known as the cost of service.
Once you have subtracted the cost of delivering the service or product the total left is the gross profit and is the money that is left to operate the business to ensure that there is still profit at the end of the day. The nett profit is the profit that is left after all the costs including the costs not directly related to product delivery are also subtracted such as marketing, accounting, director benefit, legal fees etc.
The profit and loss statement is helpful in determining where you can cut on costs, where you can allocate more money and where your business is heading.
The above is just one aspect of keeping the books in order. We strongly recommend making use of the experts at The Tax Shop to help address your business financial and accounting needs effectively. A few other tips to help you with sound financial management of your business:
If you are burning the candlelight every night and never get time to take a day off, you are doing it wrong. Being your own boss doesn’t mean having to do all the tasks on your own – you cannot be the website marketer, bookkeeper, tax master, personnel manager, sales leader and production supervisor all at once. Delegate and outsource the back-office to ensure that you can live the dream of being your own boss and ensure profitability of the business.