Why you need a Profit & Loss Report each month
Updated: Oct 24, 2021
Does your bookkeeper or accountant provide this report?
· How much profit did I make from my business last month?
· Is that better or worse than the month before
· Is my expenditure under control
· Are sales growing year to year
All these questions can be answered if you have access to a profit and loss report of your business.
The importance of having this information each month is enormous; as a business owner you need to know that if your figures change significantly you can deal with it there and then rather than at the end of your trading year.
The profit and loss report looks at the transactions of the past month and or past months. It can be run at the end of a year or monthly and most software systems these days will allow you or your bookkeeper to run this report very easily.
This report is very useful if you want to see trends in any of your figures especially the important ones like sales and understanding your costs.
Having an analysis of the figures each month means you know exactly how well or badly your business is doing and can take action to minimise losses, change up sales (eg: marketing for items selling well) and maybe reviewing expenditure.
Using the P&L to set KPI’s (key performance indicators) will enable you to manage the performance of your business and have tighter reins overall. An example of a KPI is having a sales target.
For example, you could use the P&L breakdown to measure sales by product or service. Or costs per product (if your software allows) and measure against a prior year to see if current year is outperforming a past year or years. Did the marketing campaign that cost a lot bring in more sales?
Have you heard people talk about Gross Profit? Or GP%
Knowing this number is essential.
Simply explained, the GP of a business shows if you are making a profit on the goods or services you sell before you take into account your overheads. If it costs more to make the item than to sell it – you are onto a losing business without even including any normal operating costs.
The way to work the GP out is to take the sales figure and deduct the cost of sales.
For example: for a pest controller to do a rodent job you need to buy pesticides & materials. So, you take the amount you charge to do the rodent job and deduct the pesticides & materials. That is your gross profit.
GP% is simply taking the GP and turning it into a percentage. It helps with an instant comparison to prior months or years.
Knowing your Net Profit is also important. It tells you if your business is covering its overheads (operating costs).
Sometimes, costs can spiral out of control. Keeping an eye on your NP is vital to keeping your business profitable.
Overheads will include costs like office van costs, fuel, legal & accounting fees, payroll (if you have employees), marketing spend and subscriptions.
NP is worked out by taking your GP figure and deducting your overheads.
NP% is worked out the same as GP% and is an instant visual help to see performance month on month or year on year.
The picture below is of a simple P&L Report. You can see that extra money spent on marketing in Sep has increased sales, which meant an increase in cost of sales.
The GP% quickly tells you that there is plenty of room for overheads and then the NP shows that the company is making an overall profit.
Part of my Blu Bookeeping Service includes a short video of me sharing my screen of your P&L report and me talking you through the results.
I hope you found this useful.
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