The Profit & Loss or Income Statement is everyone’s favorite financial report. But do you really understand what is and isn’t included in it? And how should it be combined with the Balance Sheet for a clearer overall picture of where your business is financially?
The first thing to remember about the Profit & Loss Statement is that is shows the monies in and out of your business for a specific period of time, usually a month, quarter, or the entire fiscal year.
Understanding Your Profit & Loss Statement
To better understand your Profit & Loss statement, let’s break it down by sections:
This is your sales or revenue for a specific period of time. But it can get a little tricky because there are two different ways to calculate your Profit & Loss, depending on the type of business you run:
Cash Basis: Tracks the actual cash you received (and paid out) for a certain time frame.
Accrual Basis: Tracks income and expenses as they are invoiced & billed. You may not have received the funds or paid the expenses, but you have “accrued” them.
The decision on which form of accounting you will use is an important one. Your tax preparer and/or accountant will help you make the decision that is right for your business.
2. Cost of Goods
These are the costs directly linked to providing your product or service. Even if you are a service-based business, you may incur what is generally known as Cost of Goods Sold. These can include material costs, labor costs, inventory purchases, etc.
Income less Cost of Goods will give you what is called a Gross Profit.
This is what your business earned after the expense of delivering your product or service.
You can also calculate your Gross Margin from here: Gross Profit /Revenue x 100
Gross Profit = $145,000 and Total Income = $975,000
$145/$975 = .15×100 = 15%
This company makes $0.15 gross profit for every $1.00 of revenue.
Sometimes referred to as Operating Expenses, General Expenses, or Administrative Expenses. Expenses include all the other costs of doing business, such as advertising, rent or leases, office expenses, administrative payroll, etc.
Gross Profit less Expenses will give you your Net Profit (you brought in more than you spent) or Net Loss (you spent more than you brought in). But remember, it is only for a specific period of time.
Profit & Loss Statement versus Balance Sheet
It’s important to note that there are some monies in and/or out that are reflected in your Balance Sheet, not your Profit & Loss Statement. For example, any funds deposited from a Line of Credit, Loan, or Investment from Owner will not be included in the Income section as these are not income. These will appear on your Balance Sheet as either Liabilities or Equity. On the Expense side, any payments to a loan balance, including credit cards, or to an owner/investor not through payroll will not be included as they are repayments or distributions from the profit, not an expense. You will also find these on the Balance Sheet as either a reduction in your liability balance or in your equity accounts.
Accounting & Bookkeeping Services in NH
To get a clear financial picture of your business you need to look at both your Profit & Loss Statement AND your Balance Sheet. Otherwise you are only seeing half the picture. If you need support with your company’s accounting and bookkeeping, the experts at Fournier Accounting and Bookkeeping Services are here to help. We serve small businesses throughout New Hampshire and the U.S. Contact us today!