I am often asked by clients what a profit and loss does; what it actually tells you and what it should actually look like. The normal Profit and Loss Statement is basically a record of all your income and all your expenses; for example a normal Profit and Loss Statement has one income account, and a whole long list of all your expenses. Most of the expenses are listed in alphabetical order which tells you absolutely nothing. You then have one figure right at the bottom which tells you what your net profit is.
In other words you can see:
- how much you’ve earned;
- the cost to generate that income and the running of your business, and;
- your net profit figure at the bottom.
So at the end of this type of Profit and Loss Statement all you really know is what you’ve earned in a total figure, the total amount of your costs and what you’re left with.
I recommend that when you set up your accounts reflected on your Profit and Loss Statement don’t just have one income account. Rather break it up so there is an account for each type of product and/or each service you provide, break it up into four or five accounts (or however many types of products or services you provide). You will get a lot more information from your Profit and Loss Statement if you make these distinctions in the set-up of your accounts.
I’d also like to recommend this: Instead of having all of your expenses listed alphabetical order, move the costs associated to that income into hidden costs and direct costs. For example a direct cost for your product is the cost of buying the product and the freight. If you provide a service and you’ve got subcontractors, that would be one of your direct costs. These direct costs and hidden costs should rather be at the top of your profit and loss in the cost of sales section.
So now your Profit and Loss Statement is much longer than it was before but now it tells you exactly how much income you earned, what the costs are associated to that income and what the gross profit is for all those products and services.
After that, list the other expenses – in other words the other expenses which you incur in running your business, for example your bookkeeping, accounting fees, insurances etc. Now you’ve got a lot more information in terms of trying to work out and see how much money you’re earning on the different products and services and what you’re actually making in your business.
These recommendations on how to change your profit and loss aim to give you more information and detail which you need to make informed REAL decisions in your business.
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