Hi there fellow business owners,
Today, I’m sharing a quick video about the importance of knowing the profit and loss (P&L) in your business. This is crucial for tracking your overall business performance.
What is a Profit and Loss Statement?
Your profit and loss statement shows all your earnings and costs over the year, providing a clear picture of your business’s overall performance. It matches your income with your expenses for the period, including adjustments for timing differences—for example, sales made where payment has not yet been received.
Key Points to Remember
It’s crucial to remember that profit is not the same as cash. The profit shown in your statement includes non-cash expenses such as depreciation. You need to ensure you have enough profit to cover cash costs like loan repayments, asset purchases, and drawings.
Your profit and loss statement also provides a framework to benchmark your results. By using percentages or comparing performance across years, you can assess how your business stacks up against similar businesses. Businesses are generally valued using a multiplier of earnings, making your profit and loss statement a key driver of your business’s value. The higher your earnings, the higher the value of your business.
Practical Example
Here’s an example using a fictitious food manufacturing company. We’ve taken the gross surplus from the trading account and listed all expenses, including the owner’s remuneration, to calculate the net surplus or loss. As you can see, the company is currently trading at a loss of over $113,000.
Now, let’s imagine the company reviews its expenses with an accountant and identifies potential savings in insurance and rent. They contact an insurance broker and negotiate a 5% reduction for both. Despite an increase in accountancy fees due to additional services, the overall net surplus increases by $138,000, resulting in a net surplus of $24,000.
Watch the video here where I talk about the Importance of Knowing Profit and Loss
Mick
I’d love to help you achieve your business dreams, please don’t hesitate to contact me;
07 5646 4050
mick@ignitionaccountants.com
Book a call for a complimentary Proactive Accounting Meeting to discuss your accounting profitability
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