Business Financials – What is a Profit and Loss Statement and what does it reveal?

Many business people want to know what is a Profit and Loss Statement, and understand what does it reveal to us.

It is one of the main business reports we use, and what does reveal is how the business is going financially in a trading period  (whether you are making a profit or loss for a period) – it is also called the Profit & Loss Statement or Income Statement or Trading Statement.

The statement shows all the sales for a period less the cost of goods (if you sell product) which leaves Gross Profit, then from that all the Expenses (operating or overheads like rent, wages etc) leaves  the Operating Profit (not always reported), then from that less any non-regular income and expenses, gives us the final Net Profit.

In summary, there are three main levels of profit or profit margins –

Gross profit (after cost of sales deducted from sales/revenue),

Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items) and

Net profit (Final, after tax and other non-regular expenses and income).

Note that “profit”, “earnings” and even “income” are all used interchangeably, and mean the same thing.

When the term "margin" is stated, it can apply to the dollar number for a given profit level and/or the number as a percentage of sales/revenues.

The absolute amount, the dollar amount, is on the Profit & Loss Statement. The net profit margin commonly uses the percentage calculation to provide a measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the sales generated.

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Cash Flow tip – Improve cashflow in small business – Invoice promptly is the top way!

I know from our clients, that many small business people are uncomfortable asking to be paid, yet the top way to improve your cashflow is by invoicing PROMPTLY!

When you run a business, (especially for service businesses) if you don’t invoice promptly as well as collect payment promptly (which causes a cash crisis in the first place), then consider the following consequences –

Consequences of delay for your cashflow:

1. Clients can quickly forget what they owe you;
2. They are less likely to remember how much they loved your work and pay you promptly;
3. They may conclude that you do not expect quick payment and will take their time in sending in their money.

Some ACTION steps:

1. Where possible, issue invoices at the time services are delivered;
2. Send your invoice by email to speed the process;
3. If you can’t issue immediately, be sure to issue your invoices weekly, or at least twice per month on designated days, such as on the 15th and 30^th or the last day of each month;
4. Do it like clockwork – it will help to even out your cashflow.

Take-away message and case study - Create the habit - invoice quickly and often!

Part of our service is assistance with cashflow budgets, debtor collection and reviewing supplier costs and terms. One of our clients said the business finance is now in the BEST shape it has ever been – our 4-5 hrs work weekly, involves managing the invoices, payment follow up (unique method) and now supplier payments! The owner now can catch up on quoting jobs and finalizing the sale to grow the business.

Could this assist you in your business and let you focus on your best skills and on running the business?

If you would like to speak with these clients, email me and I’ll supply contact details!

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

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Bookkeeping – Organising your books – Part 2

Part 1 last month, we looked at how to organise your books, your bank and credit cards as separate from your personal banking, and tips from the ATO website on record keeping.

Part 2 here, we show 6 steps that look at how to keep track of account-keeping tasks, things that need answers (queries and who to ask) and storage of records.

6 steps to get your accounts in order

Here are 6 steps to get your accounts in order - off to the right start (or improve current systems)

1. Bookkeeping Task Checklist - A summary snapshot checklist of the full accounting year - tells you what to do and where you are at – down the left side, number the items that apply to you – you may do invoices manually in another book or Word, but then only record the actual sales deposited/cashed in your excel sheet or accounting software (cash basis), or generate invoices from accounting software, and then record when customers pay you (accrual basis). Or if you have lots of small sales in a retail shop, you record the end of day sales total only eg deposit to the bank.
2. Cash Expense Organiser Sheet - Photocopy one sheet per month, then each week, sort your cash receipts into categories: fuel, stationary, postage and paper-clip them to sheet. Enter each receipt, or the total fuel etc. At end of month staple the bundles, total the expense categories – total fuel, stationary, stamps etc. Enter in the accounting records, reconciling the petty cash. Then start a new sheet and slip on the clips ready to go for the next month.
3. Small Expense Organiser  - A Sheet for small receipts paid by EFT, credit card, clip then staple as at end of month after recording. Or put the sheet and all slips for a month in a plastic pocket. File all the other supplier invoices in A4 size, in alphabetical order.
4. Contact Register  - For important conversation and negotiations such as price bargaining or discussions on what will be supplied and agreed. Also best to record disputes time and dates, very carefully.
5. Year End Comprehensive Checklist - Year end can be a busy time, especially with payroll so this checklist can be adapted to the items that apply to your business
6. Year End - Report Folder Cover Sheet -If using manual accounts or excel, list and check Debtors (accounts receivable, that you are still owed) and Creditors (accounts payable that you still need to pay). Copy the last bank and credit card statements and any reconciliation reports. If using accounting software, print Profit and Loss, Trial Balance, and check Debtors (accounts receivable) and Creditors (accounts payable) PAYG and Super reconcile to the Balance Sheet. Gather all BAS statements and reports. Gather all asset Invoices together.

Fill in the cover sheet and year, collect reports together (separate by labelled tabs for easy reference) and give to your accountant to prepare the tax returns.

Need help? Not sure? Call for FREE 30min advice / strategy session today!

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