Monthly Archives: September 2014

Profit and Loss – which one is it?

To continue my Management Accounts series I want to look at the individual reports in more detail, starting with the P&L.

I guess Profit and Loss is an odd name – it’s always going to say one or the other, not both!

A Profit and Loss report (P&L) provides an overview of the businesses profitability. As such, it is the report that everyone wants to see. It’s usually also the simplest report to understand, but what do you need to know to be able to use the figures?

The P&L is a calculation of the profit that’s left (hopefully) after you take all your costs away from your sales revenue.

I recommend looking at monthly Management Accounts, so the P&L might look like this:

An example of a monthly profit and loss report

An example monthly P&L report

Make sure you know what you’re looking at:

Firstly, it’s important to make sure you are comparing like with like; if you are looking at March it’s important to make sure all the costs and sales relating to each job, or unit of product are included.

It is important to match costs to sales to make sure the profit figure is correctIn my example, if the garage need to make sure they have included all the costs of the cars they sold, otherwise they would be fooling themselves with extra profits this month and a big loss later on.

Pound stack
What does it all mean?

Result: I’d start at the bottom – the profit (or the loss) for the month is pretty obvious.
But what about the margin; that is how much of your sales was left as profit? This lets you see how effective the business is at making profit.

Gross Profit: Next I’d work my way up to gross profit, that’s the difference between sales and the costs directly associated with them.

Gross profit is sales less the cost of parts and processing to make the sale. All the fixed costs of running the business, like rent and most salaries are counted as Overheads. So, Costs of Sales change when the amount of sales change but Overheads don’t – they may not be entirely fixed, but they change for other reasons.

Gross profit can be a tricky thing to pin down; making a healthy net profit requires a healthy gross profit, but that in turn requires two things. Graph

You need a good gross margin percentage, so that every job you do has sufficient profit after the Costs of Sales have been paid for but at the same time you need to be carrying out enough jobs (sales) to turn that gross margin percentage into money profit.

Sales: If a business does more than one thing (and that could mean selling direct to customers and also selling the same product to wholesale customers, or online) then it’s useful to know as much as possible about how the total sales figure is made up.

Comparison: All this information is great, but you’ve got to look at it in context.

It’s useful to know how much profit you’ve made in a month, but it is more useful to be able to compare it to other months, and to compare it to a target.

A P&L report should be easy to read Sometimes fitting in all the information can be a challenge – there’s a balance between having all the numbers you want and fitting them on the page!

Space allowing, I like to show the 5 previous months and a budget for the current month in my report. However, in some businesses it is helpful to also know what the same month last year looked like, to account for seasonal differences.

It’s also useful to know how you are doing compared to your target for the whole year – this month may be below target, but if you’ve had several exceptionally profitable months this alone might not be a cause for concern.

If you don’t yet have a target, well… I would suggest that you get one!
It could be as simple as covering your costs, but it’s more likely to be enough profit to pay the shareholders a dividend.

It’s worth remembering that if you need to make loan repayments, this isn’t included anywhere on the P&L report. The cash required to do that will have to come out of profits, so you might need to reflect that in your target setting.

I think I might need to come back to that another time!

What are management accounts?

I’ve taken a bit of a break from blogging over the summer and that has given me a chance to think about what I’m blogging about.

The service that I provide for my clients varies according to their circumstances, but it is always based on providing Management Accounts; but what does that mean?

Question Marks rip

From a distance management accounts give the same accounting reports that you would find in “year end”, “tax” or even “audited” accounts, but they are produced faster and on a more regular basis. Currently all my clients receive monthly figures.

This provides a benefit straight away; you can see how business is going while you still have time to react to solve problems or possibly look at ways of investing in the business in order to spend some of your taxable profits. It’s tempting, but you can’t rely on your bank statement to tell you how your business is going – the bank is only interested in recording how much money there is in your account!

Magnify ladybird
When you get closer to them you can see that there is only a passing resemblance between statutory accounts and management accounts. There are lots of rules governing how statutory accounts are calculated, and the format they are presented in. This makes sure that investors (etc) can rely on the information and compare different companies.

By contrast, good management accounts should show information specific to your individual business. There are no rules, although in practice you should try to use the same accounting rules as statutory accounts, so that there are no surprises at the end of the accounting year.

So, what are you likely to find in my management accounts?

In order to keep this blog from being too long I have outlined the reports below, but over the coming weeks I will add more details. All these posts will be in the “Management Accounts” category.

A Profit and Loss Account: A calculation of the profit that’s left (hopefully) after you take all your costs away from your sales revenue. piggy-bank-calculator

It’s useful to know how much profit you’ve made in a month, but it is more useful to be able to compare it to something – the month before, or a target, or both!

A Balance Sheet: A summary of the Company’s assets, liabilities and shareholders’ equity. This gives a snap shot of what’s going on behind the scenes

Cashflow Analysis: It’s possible (in fact it’s probably usual) to make lovely profits but end up with less money in the bank than you started with.

At the end of the day the maxim is right – “Cash is King”; you can’t run a business without cash so it is vital that you have information to explain what’s going on here.

Aged Creditors and Debtors Reports: Feeding in to your understanding of your cash position, these reports help you see if you have customers who are behind on paying their bills, or if you can expect large remittances in future. Similarly, you will be able to see how much is owed to different suppliers, as you don’t want to slip behind their terms.

Your Specific Information: For each business there are different criteria that help reveal what is going on.
Pensive ParakeetThis might be a sales analysis, showing the split of sales between different categories of customers or the number of sales in the month; it might be the number of times a machine was used in the month; or even the number of hours worked by key staff.

Anything Else! From time to time there are different bits of information that you might want to see; the answers to particular questions that have cropped up, or comparisons over periods longer than a month.

Finally, all this information is great but on its own it’s not enough. For me, the most important part of producing Management Accounts is sitting down with the business owner or managers and talking through what they mean.

Sheets of paper don’t run successful businesses – people do!