Profit and Loss

What is a profit and loss account

The profit and loss account is a way to look at the past performance of your company. Its different  to a balance sheet which is a snapshot of the present, and the cash flow forecast which is a look into the future. All profit and loss statements have these important categories;

Revenue/Income/Sales – This is usually at the top of the profit and loss statement. This is how much money is brought  into the business from a sales perspective.

Cost of goods sold – Sometimes called variable costs, and relate directly to what has been sold. Essentially, this is the direct costs attributable to the production of the goods sold by the company. This includes, cost of materials used in creating the good, along with the direct labour costs used to produce the good.

Gross profit – What is left over, when you deduct cost of goods sold from total revenue.  This is what is used to run the rest of the business. This can also be referred to as gross margin. It is sometimes represented as a percentage on actual P&L accounts. This figure would be the gross figure as a % of the sales figure.

Fixed expenses – Sometimes referred to as business overheads. Expenses which are fixed on a month by month basis. This includes, rent, machinery and building purchases.

Net profit – This is also known as your bottom line. This is what’s left over once you deduct fixed expenses from gross profit.

Operating expenses – These represent the indirect costs of doing business. This includes, R&D (research and development) and SG&A (selling, general & admin; this will include the marketing budget, cost of the stores & sales staff).

Operating income – By deducting the operating expenses from the gross margin you can get the operating income. From this we can work out the operating margin. If the operating margin hasn’t increased as much as the gross margin then it can be assumed that the profits have been re-invested into R&D or SG&A.