Understanding Your Profit & Loss Statement

Why Your P&L Matters

Understanding the relationship between revenue and expenses is one of the most important parts of running a successful business. A well-prepared Profit & Loss statement (P&L) can provide valuable insight into profitability, efficiency and overall business performance.

What Is a Profit & Loss Statement?

A Profit & Loss statement, sometimes referred to as an Income Statement, summarises a business’s income and expenses over a specific period of time. Unlike a balance sheet, which provides a snapshot at a point in time, the P&L shows financial performance across a month, quarter or financial year. When reviewed together, these reports provide a broader understanding of the financial position and operational performance of a business.

The Two Main Sections

The two main sections of a P&L statement are income and expenses. Revenue generally includes income generated from the core operations of the business, such as sales or services, as well as other income sources including interest, investment income or secondary business activities. Expenses are commonly divided into direct costs and overhead expenses.

Understanding Direct Costs

Direct costs, often referred to as cost of goods sold, are expenses directly linked to generating income. Examples may include inventory purchases, contractor costs, freight, importing costs or equipment directly related to production or service delivery. Understanding these costs is essential when reviewing margins and pricing.

Understanding Overheads

Overhead expenses are the ongoing costs required to operate the business regardless of sales levels. These may include rent, utilities, bookkeeping fees, staff costs, professional development and vehicle expenses. Monitoring overheads can help business owners better understand their break-even point and overall cost structure.

Looking Beyond the Bottom Line

Once total expenses are deducted from total income, the result is the net profit or loss, commonly referred to as the “bottom line”.

However, focusing only on profit can overlook important trends and operational issues within the business.

A properly analysed P&L can help identify:

• Changes in margins

• Seasonal trends

• Expense blowouts

• Cost allocation issues

• Unrecovered billable expenses

Using Financial Reports to Make Better Decisions Financial reports are more than compliance documents, they are decision-making tools. With a deeper understanding of your business finances, you can make more informed strategic and operational decisions.

At Lockwood & Ward, we work with business owners to help them understand their financial reports and use the information to make better business decisions.

Contact Lockwood & Ward on (02) 9299 7044, visit www.lockwood.com.au, or stop by Level 9, 50 Clarence Street, Sydney NSW 2000.