In this series, we’ve looked at a variety of things that you should do each month to keep on top of your business finances, but we’re now going to turn our attention to a key tool that will help you understand your overall business financial health: the Profit and Loss (P&L) statement. This is a critical financial report for any business and you can always consult a bookkeeper or accountant to help you leverage it effectively.
Sometimes referred to as the Statement of Financial Performance, this document provides you with a summary of revenues, costs and expenses over a specific period, usually monthly. In this blog, we will explore the components of a P&L statement and look at the essential accounting adjustments that are needed to present an accurate picture of your business’ performance.
What is a Profit & Loss Statement?
P&L statements are financial reports that show whether your business has achieved a profit or incurred a loss over a defined period. It provides you with important information on your overall financial performance by comparing your revenue and expenses. In the UK, this statement is extremely valuable, especially for limited companies, as it is the basis for accrual accounting and necessary for preparing your annual return. Your P&L statement is a key task you can ask a bookkeeper to help with so you can ensure it is always accurate and up to date.
Key Components of a P&L Statement
Sales and Revenue:
A P&L statement begins with the total sales or revenue generated during the accounting period. This figure covers all the income earned, regardless of whether payment has been received.
Direct Expenses:
These are the costs directly tied to producing goods or delivering services. They are then typically deducted from sales to determine the Gross Profit. Your bookkeeper can help track these expenses accurately to ensure your P&L statement reflects true profitability.
Overhead Expenses:
These expenses include all the other operational costs required to run the business such as rent, utilities, salaries and accounting fees. Monitoring these expenses is crucial for understanding the full cost structure of your business.
Gross Profit and Net Profit:
Gross Profit is calculated by subtracting direct expenses from total sales.
Net Profit is determined by subtracting overhead expenses from the gross profit. This figure is critical for evaluating your business’ overall profitability.
If you have a bookkeeper, they can help you interpret these figures to help make better financial decisions.
Advanced Accounting Adjustments
To ensure your P&L statement is accurate, certain accounting adjustments are necessary. A bookkeeper can guide you through these adjustments:
Income Received in Advance:
All income received for future periods must be allocated accordingly. For example, if income for August is received in July, it should be recorded in August’s accounts.
Accrued Income:
For any work that has been completed but not invoiced or paid for, the income should be recognised in the period that the work took place.
Expenses Paid in Advance:
Expenses such as annual insurance, which are paid upfront but cover multiple periods, should be allocated appropriately. For instance, annual insurance paid in July should be divided by twelve and allocated to each month accordingly. Your bookkeeper can ensure these allocations are handled correctly.
Accrued Expenses:
If any expenses have been incurred but have not yet been paid for, these should be recorded in the period they apply to. This ensures that all costs are accurately represented.
The Importance of Regular Review
It’s essential to review your P&L statement on a monthly basis. Regular review allows you to determine whether your sales are sufficient to cover expenses and how well you’re adhering to your budget. Regular review also means you can identify any discrepancies or areas for improvement before they develop into major issues. By outsourcing this work to a bookkeeper or accountant, they will help you maintain this monthly routine, keeping your business on track.
The Benefits & Rewards
Diligent bookkeeping and making necessary adjustments will maintain the accuracy of your P&L statement - this is key to sustaining your business’ financial health. By understanding and applying these principles, you can gain valuable insights that will help you make better business decisions. Get into the habit of reviewing your P&L statement every month so you can keep your finances on track and ensure long-term success for your business.
Mastering your P&L statement will involve understanding the different components within it, making essential accounting adjustments and regular review. Not only does this help you assess your financial performance, but it will enable you to strategically plan your next moves as well as maintain the overall health of your business. By dedicating time each month to thoroughly review your P&L statement, you will create a habit that will reward you in the long run.
Are you a company director navigating the complexities of month-end financial management?
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You can also check out our YouTube series where our Founder, Kath Vincent, breaks down each topic in-depth.
Long White Cloud Accounting is based in Sutton, South London and serves established limited company service-based clients in the Greater London area. Led by Kath Vincent, we provide high-quality bookkeeping to keep you on top of what’s happening in your business each month. Looking for bookkeeping support? Click below to book a chat with Kath.
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