Profit and Loss Statement

Profit and Loss Statement

The summary of revenue less costs incurred over a specific period of time. A snapshot of your business that shows whether or not your business was profitable during a specified time period (monthly, quarterly, or annually).

One of the three financial statements that you need to include in the Financial Plan section of the business plan.

Profit and Loss Statement Features

• Revenue - Money generated from normal business operations (e.g. goods sales or service fee).

• Cost of sales - Money outlaid for the product being sold or service provided.

• Gross profit - The amount of return from a product before operating expenses.

• Operating expenses - Costs incurred from a business’ normal operation (administration, marketing).

• Profit - Financial gain of business from its normal operations.

• Loss - Financial deficit of the business from its normal operations (when expenses are more than its revenue).

Profit and loss statement Purpose

Businesses need to make a profit to stay in business, therefore it must be monitored and any drops in revenue or increase in expenses resulting in the change of profit must be investigated.

Expenses

Cost of Sales:

• Retail business - the wholesale price of the product you are selling and any transport costs to get the product to the store.

• Manufacturing business - all the costs associated with the inputs (e.g. raw materials) and the factory processes (including labour and maintenance of machinery).

Operating Costs:

• Administration

• Marketing costs

Profit and loss statement performance assessment methods

• Change in sales revenue in comparison to industry growth over the period.

• Change in gross profit margin and net profit margin over the period.

• Comparison of the entity’s profitability with other organizations operating in similar industries or sectors.

Profitability

The measure of how efficiently a business converts its expenses into profits.

Net Profit Ratio

Used to measure profitability (efficiency of generating profits). Data used for profitability calculation is found in the profit and loss statement. Includes:

• Profit - the financial gain of the business from its normal operations,

• Net Sales - the revenue received from the products sold less any sales returns.

Net Profit Ratio calculation

Calculation = (Profit / Net Sales)

Every $1 of Net Sales makes _cents profit

Corrective actions

Depending on where the inefficiencies are occurring, these some of these can be taken.

Profit:

• Decrease operating expenses,

• Decrease manufacturing expenses by investing in machinery or renewable energy, recycle water etc.,

• Negotiate better deals with suppliers (may include larger bulk purchases for discounts),

• Reducing waste in manufacturing by using experienced or trained staff.

Net Sales:

• Increase sales by increasing their target market to other geographic or demographics,

• Innovating products/services to generate more sales.

Profitability comparisons

Interpretation of one figure by itself means very little. For management to interpret profitability they need take into account other things to determine if profitability is increasing or decreasing.

• Past figures - Is the profit ratio increasing or decreasing? If increasing the business is becoming more efficient or profitable,

• Like businesses (are you as efficient as your competitors),

• Industry standards/benchmarks.