Profit and Loss 101
This blog has been previously published however I wanted to share it with you again as the content is still relevant and valuable.
A profit and loss statement, in broad terms, shows the income and expenses of the business. However, there are a few tricks to getting this right and understanding what this report shows you.
Income or Revenue.
This is what you have earned from the fees you charged your clients. Now, if you invoice a client in one month but they don’t pay you until the following month, the fee will be included in the month you issued the invoice. The trick here is to be aware that the income in the ‘profit and loss’ is the amount you have invoiced and it may not be the same as the money you have banked.
Cost of Sales.
Most paediatric service providers don’t have their accounting system set up to record cost of sales. I believe that the cost of you or your team delivering your services should be reported as cost of sales, but more on that in a future article.
When you look at your profit and loss statement, you will most likely find that it lists the business expenses in alphabetical order. The expenses are the costs to run your business. What expenses don’t include is repayment of loans, tax office payments, hire purchase, or finance on vehicles or equipment. It also won’t include any payments you make to yourself over and above your salary (if you are an employee of your business), nor will it include the amounts you withdraw for yourself (if you are a sole trader).
If your accounting system is updated regularly with invoices for costs to run the business, then the figures in the expenses will include those expenses irrespective of whether you’ve paid them yet or not. However, if the expenses are only entered into your accounting system when they are paid out of your bank account or processed through your credit card, then the expenses in the ‘profit and loss’ will match—exactly—the money you’ve paid out.
There are two points to remember with a profit and loss statement:
- Be aware your profit and loss statement reports profits and not cash flow.
- Take a quick look at this report after the end of each month. Don’t look at it during the month as the numbers will not truly reflect your results. Consider if you pay your rent at the end of the month, looking at your report at the end of the third week may look great, but then after the fourth week of the month with the rent paid, it may not look quite so good.
Developing and maintaining good financial practices and end of month habits is critical for business success. It’s ok if you are still learning, and please remember to always ask for help if you need it.
Article by Amanda Fisher