Reading your business’s Statement of Profit and Loss

 

The Statement of Profit and Loss (also known as P/L) summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. It is one of the four main financial statements, the other three being the Statement of Financial Position (Balance Sheet), Statement of Cash Flow and Statement of Changes in Equity. The P/L is important because it helps a business owner to evaluate the performance of his/ her business and provides a basis for forecasting future performance.

Most owners tend to only look at the bottom line and fail to do much with the P/L beyond that. This article provides you some tips on how to read a P/L just like an accountant would so that you can make sound financial decisions based on that. A monthly review of your P/L would prove to be invaluable and it doesn’t have to take a lot of time if you have the right tools available.

Overview

Every P/L comprises of 4 main components namely,

• Sales – The revenue generated through the sale of the company’s goods or servies

• Cost of Goods Sold- The direct cost of producing the goods or services sold by the company, such as materials and labor.

• Expenses – The indirect costs incurred by the business to generate revenue such as salary cost, administration expenses

• Net profit/ loss – The net revenue remaining after paying off all expenses incurred by the business.

The P/L can be used by business owners to,

1. Carry out a month month-on-month or year-on-year analysis
2. Calculate Key Performance Indicators (KPIs)/ metrics
3. Compare metrics against industry benchmarks/ competitors

1. Carry out a month-on-month-on-month or year-on-year analysis

Do a comparison for each line in the P/L with the figures of the previous month/ year. Any significant variances such as an unanticipated increase in costs or reduction in revenue need to be investigated to identify the root cause. Look ahead to what the next steps are based on those results and if any adjustments should be made. You may have to dive deeper into your costs to find ways to bring it down in order to see planned results.

2. Calculate Key Performance Indicators (KPIs)

You can calculate metrics to track how well the company has performed. Some of the metrics that you can use are listed out below,

• Gross Profit margin= Gross Profit/ Sales
This ratio shows how much of your sales is profit after considering direct costs

• Net Profit Margin= Net Profit/ Sales
This ratio shows how much of your sales is profit after considering direct and indirect costs

• Return on equity= Net Profit/ Equity
Shows the return the owner has made on the capital invested

3. Compare metrics against industry benchmarks/ competitors

Once you have calculated the KPIs for your business, you can compare against industry benchmarks or competitor metrics if the data is available. If your metrics are close to the industry benchmarks that would indicate your company performance is on par with similar companies in the industry. Industry benchmarks can be obtained through research agencies that specialize in providing insights on industry performance.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.