Profit & Loss
There are 3 financial reports at the heart of your business planning. If you don’t use them your business decisions are mostly guesswork.
1. Cash Flow
2. Profit & Loss
3. Balance Sheet
A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows on the 'bottom line' whether your business made a profit or loss at the end of that period.
To steer your company in the financial direction you want it to take, you need to understand where you're making money and where you're spending it. This is why you should keep accounts and produce regular reports, including a profit and loss account.
Your profit and loss account (P&L) shows business performance. It measures how much money you have made, and how you made it, over a given period. Typically, this period is a month or consolidated months over a year.
| Terminology | Description |
| Revenue | Your sales during the period are recorded here. This is the “top line” revenue showing the total value of sales made to customers |
| Cost of sales | The cost of labour and materials to generate the above revenues go into “cost of sales”. This would include the cost of raw materials, components, goods bought for resale and the direct labour costs of production. |
| Gross profit | The difference between revenue and cost of sales. A simple measure of how much profit is generated from every £1 of revenue before overheads and other expenses are taken into account. Is used to calculate the gross profit margin (%) |
| Distribution & administration expenses | Operating costs and expenses that are not directly related to producing the goods or services are recorded here. These would include distribution costs (e.g. marketing, transport) and all the various administrative expenses and overheads that a business incurs. |
| Operating profit | Records how much profit has been made in total from the trading activities of the business before any account is taken of how the business is financed. |
| Finance expenses | Interest paid on bank and other borrowings, less interest income received on cash balances, is shown here. A useful figure for managers to assess how much profit is being used up by loans made to the business. |
| Profit before tax | Calculated as operating profit less finance expenses |
| Tax | An estimate of the amount of corporation tax that is likely to be payable on the recorded profit before tax |
| Profit attributable to shareholders | The amount of profit that is left after the tax has been accounted for. The shareholders then decide how much of this is paid out to them in dividends and how much is left in the business (“retained earnings” in the equity section of the balance sheet) |
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