How to Read a Profit and Loss StatementPublished on 18th December 2018 2018-12-18T08:43:25+00:00 - Last update on 28th December 2018 2018-12-28T12:39:07+00:00
Whether you’re starting a new venture or are already established, running and maintaining a successful business in the UK isn’t a task to be taken lightly and is one that requires many hours of dedication and hard work. But one aspect that demands constant attention and regular fine-tuning is the stability of your finances and, in particular, your business’ Net Profit. This is why every business needs to create and keep up-to-date a detailed Profit and Loss Statement to provide you with the means necessary to track all of your revenue sources and expenses in a clear and concise manner. So, how do you read a Profit and Loss Statement and make the most of the information it presents?
Why are Profit and Loss Statements so important in business?
Profit and Loss (P&L) Statements are meant to provide you with an accurate forecast of how well your business is performing financially during any given time frame. To achieve this, such statements consider two aspects of your day-to-day operations: Revenue and Expenses. From the information it collects, you’re able to calculate your business’ Turnover, Gross Margin, and Net Profit. Therefore, by regularly reviewing a Profit and Loss Statement, you can visualise the profitability of your venture. But if you’re currently incurring losses instead, a Profit and Loss Statement can help you identify any issues early, giving you more time to formulate a suitable countermeasure before it gets worse.
How to read a Profit and Loss Statement?
If you haven’t done so before, learning how to read a Profit and Loss Statement, let alone create one, can be daunting. However, overcoming this obstacle is essential if you’re to make well informed financial decisions which will directly affect the future of your business. Fortunately, it isn’t as complicated as it may sound.
How to calculate Turnover and Gross Margin from profit and loss account?
When developing a Profit and Loss Account for your business, the first section of the statement should always discuss your sales revenue and the profits you’ve made. This involves pulling in your Turnover (Sales Incomes) and the cost of Sales (costs incurred in the production and delivery of goods/services) in order to ascertain your business’ Gross Margin. To elaborate, you need to use the following formula:
Turnover - Costs of Sales = Gross Margin
A working example of this may appear as:
|Cost of sales||£93,900|
How to calculate Net Profits from a Profit and Loss Account?
Whereas Gross Margin is associated exclusively with your sales revenue during a specific timeframe, Net Profit, on the other hand, takes into account the whole of your business’ Total Income and Expenses (Operating and Non-Operating costs). This enables you to read and extract detailed information that will provide you with the means to ascertain whether you’ve generated a profit after everything is said and done. So in practice, the next part of your Profit and Loss Statement may appear something like this:
The final stage should look like this:
|Other sources of Income||£25,000|
Net Profit (Total Income - Total Expenses)
Need help supporting your business’ finances?
Naturally, after reviewing your business’ Profit and Loss Statements, you'll want to see that you’re generating a profit and can easily support your operating expenses. However, managing a business is never straightforward. As such, you may run into a period where you are actually incurring losses which, if left unchallenged, could result in you being unable to support your financial obligations. But rather than fall foul of your creditors, you could reinforce your bottom line by applying for Working Capital Finance and gain access to a variety of business finance solutions, including Merchant Cash Advance (MCA), Overdraft Replacement, Invoice Finance and Asset Refinance. All you need to do is choose a suitable finance agreement for your business from a lender you can trust, which is where we can help.
At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you a comprehensive overview of more than 23,000 business finance products. Our services are free to use for business owners and their advisors and we’ll also guide you through the application process. So if you’re hoping to support your business’ finances, apply for Working Capital Finance today or find out more with Rangewell.
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