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!

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