How can you be successful with your business finances? By knowing how to make adjustments at the right time.
Sounds simple, right? As long as your profit and loss statement (P&L statement) and all of your business finances, in general, are kept up to date, it’ll be easy. Right?
Perhaps you want to do it yourself, or maybe you would rather leave it to a professional. Either way, knowing how to read your P&L statement can significantly increase your business’s success over the long term.
What is a P&L Statement?
A profit and loss statement is a financial tool you can use to assess the financial health of your business. Also known as an income statement, a P&L statement shows you your business’s profits and losses over a specific period of time, whether it be over a month, a quarter, or a year.
A P&L statement is one of the three most crucial financial statements of your business (alongside your cash flow statement and balance sheet). Even if you’ve hired a professional to look after your bookkeeping, knowing the elements of your P&L statement will still assist you in creating even more profits. Plus, it’s a little more straightforward than the two other financial statements.
A P&L Statement Breakdown
The first step to understanding your P&L statement is knowing the breakdown and knowing what each element means. On a P&L statement, you’ll find:
1. Revenue
Revenue represents the money your business has coming in from sales or services before anything else is deducted.
2. Cost of Revenue
The cost of revenue includes expenses and costs that are required to make your revenue. This can consist of both cost of goods sold as well as cost of sales.
Cost of Goods Sold
Cost of goods sold are expenses incurred to make the products you sell. These are often things such as supplies, materials, and labour.
Cost of Sales
You incur cost of sales expenses when you sell a service instead of a good. For example, if you’re providing a roofing service, this would be your labour cost.
It’s important to note, if an expense is not directly related to sales revenue, it wouldn’t fall under cost of sales. For example, if you hire a bookkeeper for your business, this would fall under operating expenses.
3. Gross Margin
Gross margin is also sometimes referred to as gross profit. To determine your gross margin, you would subtract your cost of goods sold and cost of sales from your revenue. This number will give you an idea of how profitable your goods and services really are.
4. Operating Expenses
Operating expenses include everything necessary to run the business exclusive of your cost of revenue and depreciating assets. Your operating expenses would be things such as:
Payroll for HR Employees
Rent
Internet Services
Website Costs
Employee Benefits
Office supplies
5. Operating Income
Your operating income is also known as your earnings before interest, taxes, depreciation, and amortization (EBITDA). To get this number, you would subtract your cost of revenue and operating expenses from your sales and revenue.
6. Interest
Your interest expenses would include anything you’re currently paying interest or financial fees for, such as a debt or a loan.
7. Depreciation and Amortization Expenses
Depreciable Assets (or property) require a significant upfront cost and result in depreciation expenses over their years of use. This is because the Canada Revenue Agency doesn’t allow you to claim the entire amount you spend as an expense in the first year. You can only claim a certain percentage of capital cost allowance each year based on the class of property. For more information on capital cost allowance, check out one of our previous blog post here.
Amortization expenses are a result of the value of an intangible asset being spread over time. These intangible assets are often for things such as patents or copyrights. This process can be complicated and would be easier to navigate with a professional if it applies to your situation.
EBITDA v. EBIT v. EBT
Not all small business owners would have depreciation or amortization expenses and, in that case, would only include their earnings before interest and tax (EBIT). Going one step further, a business owner may subtract any interest, depreciation, and amortization expenses from their EBITDA to get their earnings before tax (EBT).
Knowing your EBT can help you identify how much you’re spending on taxes each year. It will also help in making smart timing decisions when it comes to developing your business. For example, you might hold off on an investment due to a high tax bill.
Why your P&L Statement will Improve your Success
Your P&L statement allows you to make smart decisions about how and when to make changes in your business. By knowing how to read your P&L statement accurately, you’ll be able to break down your revenue and expenses and identify where adjustments are needed to ensure your business’s success.
When considering things like your gross margin, you’ll be better positioned to assess and determine whether you need to focus and make changes to the pricing structure of your services or goods.
When looking at your EBITDA, you’ll get a better idea of your overhead expenses. If you can adjust that area, you’ll identify it and be in a better position to make decisions to cut back on staffing levels.
Take Advantage of your P&L Statement
Do you have an up-to-date P&L statement available to you right now? If you don’t, it’s time to get one!
If you do, have you had a chance to utilize it to its full potential?
This is one of the many advantages of using a professional bookkeeper. They will keep your P&L statement or report up to date for you so that it’s available any time you need to make a big decision. To get assistance with your P&L statement and other bookkeeping services, don’t wait! Request a quote from us today!