Mastering the Profit & Loss in Bookkeeping
“When was the last time you looked at your Profit & Loss Statement?”
I don’t usually ask this question to business owners because more often than not I get a look that tells me that they have no idea what I am talking about. But as a business owner, it is so important to look at this report as well as a few others on a regular basis (monthly or at the very least quarterly).
Now I do understand why a business owner would be reluctant to look at this report – can you guess why? Because it is confusing! There are few people that find a page full of numbers interesting. Thankfully I am one of them!
I mentioned that as a business owner it is part of your responsibility to look at this report and know where your business is financially but note that I didn’t say that you have to do it on your own. A good bookkeeper will accomplish all the heavy lifting, so to speak, for the creation of these reports. But that still doesn’t solve the dilemma of understanding what those reports are telling you!
Let’s jump in and begin mastering the Profit & Loss.
Your Profit & Loss should be in the year-to-date format most of the time. You can also view the report by quarter, month, week, etc. Your bookkeeper can customize your reports for you so you can easily compare periods.
The Profit & Loss should encompass dates only up to the most recent bank reconciliation done by your bookkeeper. This means that all the numbers in your Profit & Loss are accurate but if the term “reconciliation” is not familiar to you, ask your bookkeeper about it! Basically it is a system of checks & balances to ensure that all data entered into your bookkeeping software is correct.
At the top of your Profit & Loss you will see a section for income. Different types of income can be separated out into accounts. Just tell your bookkeeper how you would like to see your income separated so you can have a better understanding of where your income is coming from.
This is a very useful tool so that as a business owner you can see which products or services are making you money and which are not.
3. Cost of Goods Sold
The next section down on your Profit & Loss statement is Cost of Goods Sold or COGS. This encompasses expenses that are a direct cost of producing the product or service being sold. Specific materials for creating your product can be included in this as well as payroll in some cases (if the time spent is directly related to the service provided). Discuss with your bookkeeper what expenses should be in the COGS category.
The final section on your Profit & Loss is Expenses. This separates out all other expenses for running the business into different accounts. The primary value in this is that you can make the most of deductions you are able to take when tax-time rolls around. Separating each expense out by account makes it really easy for your CPA to get you all applicable deductions.
You can also look more closely at where your money is going. This is useful in two ways: First of all you can see if you are over-spending in any areas. Secondly, you can see if you should be spending more in some areas. Your bookkeeper can help you research the trends in your market to help you know what you should be spending in specific categories (i.e. average payroll budget for your industry, average marketing budget for your industry, etc.) so you can make the most out of the money coming out of your business.
5. Net Income
You will see Net Income as the final item at the bottom of your Profit & Loss statement. This is the final amount left over after all your income is entered and expenses are taken, out for a specific period of time. Please note that this does not include money you have taken out as an Owner’s Draw or Distribution, large purchases that are considered assets, amongst a few other things. These items are found on the balance sheet, which will be discussed in a later blog entry.
Now you should feel much more confident when looking at your Profit & Loss. It is a page full of meaningless numbers no longer! Please download Thrive Bookkeeping’s free PDF, “Profit & Loss Cheat Sheet” and save it for future reference!
I also encourage you to take a look at your own Profit & Loss for your business and practice understanding what it is telling you Feel free to email or comment with any questions you have regarding the Profit & Loss and I would be happy to spend some time with you going more in-depth into your financial statements.
*Thrive Bookkeeping offers free 1-hour training & review of financial statements on a monthly or quarterly basis to all its clients. Not all bookkeepers do this but it is an invaluable service that is vital to the health and success of your business. Please contact me if you would like to schedule a free 1-hour consultation to discuss your bookkeeping needs