A profit and loss statement is a precise document that outlines the income and expenditure of your business over a set period. Often produced quarterly and at the end of the financial year, your profit and loss is a clear statement of the financial health of your business. It can be used to analyse the performance of your business activities.
What is a Profit and Loss Statement?
Your profit and loss statement is a core document that reveals the health of your business finances. It gives a clear view of your income and expenditure over a set period, and it highlights where you are succeeding and where there needs to be improvement. This may inform key decisions about where your business needs further investment or what dividends to pay out. Your profit and loss statement will include a number of categories:
- Revenue which is income generated by selling your products or services
- Cost of goods or services sold
- Selling, general and administrative (SG&A) expenses, this includes marketing costs, rent and travel costs
- Interest expenses
- Taxes
- Net income
To calculate whether you’ve made a profit or a loss, you should subtract the total value of your debts from the total value of revenue that has been paid to you over the set period. If the number is positive, you’ve made a profit. If it is negative your business has made a loss.
Profit and Loss Statement Analysis
Your profit and loss statement can be used to analyse the profitability of your business operations in a number of ways.
Seek Out The Positives
Identify what areas are doing well and look at ways to keep this sustainable in the long term. Identify where losses are being made and seek ways to streamline costs in this area, this might be adjusting quantities or seeking another supplier. If you have historical data, use this to identify key trends, both positive and negative, to help you analyse your business’s performance year-on-year.
Calculate Your Margins
A margin is the difference between the price of a product or service and the amount of money it costs to produce or perform it. Include gross and net profit margins, operating margin and EBITDA (earnings before interest, tax, depreciation and amortisation). Seek ways to adjust these in your favour.
Calculate Your Rates of Return
You will also need your balance sheet to do this. A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. You are calculating the percentage change from the beginning of the period until the end. By adding all of your liabilities, meaning money borrowed, and shareholders’ equity, meaning money generated through investment, you can work out the value of a company’s assets. If you find out that the balance sheet does not balance, or that the value of your assets is below the value of your liabilities this means your business is in a risky position and you should take action.
What is the Balance Sheet?
Your balance sheet is the financial statement reporting your business’s assets, liabilities, and shareholder equity. The balance sheet shows whether your assets are greater than your liabilities, as opposed to looking at customer demand, it shows you how effectively a business is using the resources it has access to. The three core financial statements used to evaluate the business are your balance sheet, profit and loss statement and your cash flow statement. Your balance sheet is different from your profit and loss statement, whereby it provides a snapshot of the business’s finances, meaning what it owns and owes, at the time of publication, as opposed to data about the health of your business over a period of time. Your balance sheet and your profit and loss statement interact to help you evaluate your business position, but they are not interchangeable.
Filing Your Statutory Accounts
All limited companies need to file their statutory accounts with HMRC. This includes your balance sheet, profit and loss statement and a director’s report, as part of your financial year end reporting. You will produce a cash flow statement at year end as well, however it is usual that this will be a more regularly produced report as part of your financial operations. Prestige Business Management can prepare these documents for you and help you to analyse the data for a thorough health check of your business position and help inform strategic business decisions. Our aim is to streamline your financial administration to allow you to focus on the more bespoke elements of your business development. We will also ensure that you remain fully compliant with HMRC and shareholder requirements.
Prestige Business Management Works For You
At Prestige Business Management we can help you keep and analyse your records easily and accurately, to help you fulfil your professional goals. Find out what we can do for you. Call us today on 0203 773 2927.
