Essential information you need to understand in a profit & loss report

It is such a whiff of fresh air if a business owner sees a Profit & Loss Report that demonstrates positive figures because it only indicates that the business is heading in a favourable direction. However, little do business owners know that it takes more than just going over the reports to thoroughly understand its significance to the business. There are business owners who content themselves leaving everything to the bookkeeper including generating Profit & Loss Report. Although bookkeepers are known for getting the reports ready, this does not necessarily mean that business owners should not take a look at the reports.

When running a business, regular monitoring of business performance is important. It keeps you updated of the decisions you need to make and you can also effectively identify the factors that contribute to the success of your business. As much as possible, a Profit & Loss Report must be run over a specified period of time. There is a heap of information you can get from the report such as the income that your business has received and the money lost. A bookkeeper explains the figures in the simplest possible terms. This is why you need to gain basic understanding on interpreting these reports.

Income

The total invoices or sales invoiced over a selected period are referred to as Income. The Income is GST Exclusive and is accrual based. It can be found right at the bottom of the report. The Income is also known as turnover. The income is also the total dollar figure of invoices based on the invoice date regardless of the date you received the payment.

Cost of Goods Sold or Purchases

It shows the expenses you have incurred that have directly contributed to your income. Your purchases are considered inventory items and the cost of goods sold are the items for sale.

Gross Profit

When the income is subtracted from the Cost of Goods Sold, it will give you the Gross Profit. You will be able to understand the markup percentages by simply referring to the gross profit. This is also expressed as a percentage of income. It is possible for your gross profit to be equal to your income if your business has no cost of goods sold.

Expenses

Aside from cost of goods sold, the expenses section also shows other expenses that your business has incurred. It is important that these expenses are categorised correctly. Some of the expenses that are found under this section include administration expenses, operating expenses and payroll expenses.

Net Profit or Net Loss

Net profit is the result of the total of income, less cost of goods sold less expenses. Your business makes a profit if the figure is positive. However, the business has made a loss if the figure is negative.

If you want to know about the amount of money available in your bank account, a Profit & Loss Report can provide you the information you need. It is also possible for the profit to be high and the cash flow to be low. Even if you have a healthy cashflow, it does not necessarily follow that you have a healthy profit.