What is a Profit & Loss Statement (P&L)?
This is a financial statement that easily summarizes revenues, costs and expenses over a specific period of time. This can be monthly, quarterly or yearly depending on the time frame needed. This document provides information about a company’s opportunity to generate additional profits by increasing revenue or reducing costs even both.
SALES
Reviewing your sales first allows you to gain the knowledge on where your sales currently stand. Generally speaking if sales have increased, this is the best way to improve profitability for the future. If you think that a specific month was exceptionally better than the rest, try to remember why and what was done differently so you can duplicate what was done in the profitable month again.
SOURCES OF INCOME (Sales)
This section ties in directly to your sources of income. This is the opportunity to review the sources of income and double check if they are profitable and beneficial to your business. You can look at the ones that are very time consuming with low margins.
(Ex. Sources of income are selling smoothies and fruit bars. Neither of them are directly negatively impacting the business right? But the fruit bar sales have dropped tremendously. So it may be time to decide to eliminate the product or change the product)
SEASONALITY
Seasonality refers to periodic fluctuations in certain business areas and cycles that occur and how your business is affected based on the season. It can reflect in both your business’s sales and expenses. It’s important to remember when tracking economic data. Economic growth can be affected by additional seasonal factors (i.e. holidays, weather, natural disasters)
COST OF GOODS SOLD
This section is very important when evaluating your P&L. This number should increase as the revenue increases because these expenses directly link to your product. If this does not occur it may be a red flag. But when you are reviewing costs of goods sold you can take a look at this section and evaluate ways to reduce these expenses, not eliminate them. Finding ways to lower the costs of goods sold will help increase the bottom line and your business’s profit margin.
NET INCOME
This should be the fun part, your profit and is one of the most important parts of the business if you plan for it to succeed and become more sustainable over time. Profits should be positive (In the black) But there are some exceptions where it’s acceptable to see profit loss. For example, if the company made a large, strategic investment in an attempt to decrease cost or increase sales.
(Ex. From our example earlier, if this business owner decided to purchase cups, straws, napkins and sugar as a bulk purchase to last the entire year in the month of February. This could bring the company into a loss for that month alone, but the expense is recouped with savings and higher profit margins throughout the remainder of the year)
NET INCOME-PERCENTAGE of SALES known as Profit Margin
This is your bottom line, it’s still important to calculate this number and determine your net income percentage so that it can be used to compare across other time periods as well as additional companies in the same industry. Determining the net income as a percentage of sales. Divide the net income by the net revenue, next multiply the amount by 100.
( Ex. $457.07 -Net income for February- divide it by $689.01 – total sales in February- equals 0.6633 Then multiple this number to get 66.33%.) Once you have this percentage, you can use this to assess if your profit margins are increasing (yay) or decreasing (bad) or staying the same. This data can also be compared to other companies in the same industry.
TK Accounting & Consulting 