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What is a Profit and Loss Account?

Published on 30th November 2018 - Last update on 3rd December 2018

As well as monitoring your day-to-day operations and preparing for the future, you also need to keep a close watch on how well your business is performing financially in real-time - in particular, how much money is entering and leaving your business - indicating whether or not it’s generating a profit. One way that both you and your accountant can ascertain this is by regularly maintaining an up-to-date Profit and Loss Account. So, what is a Profit and Loss Account and why is it so important to your business?

Why do we prepare a Profit and Loss Account?

Every UK business depends on being able to earn a reliable revenue each working day. But as you continue to trade and perform day-to-day tasks, you also accumulate a number of expenses as well. So, as a business owner, it’s down to you to make sure that you’re not spending more than you’re earning which is why a Profit and Loss statement is so important. Without it, making astute financial decisions would become a struggle, with your cash reserves dwindling away without you realising it.

Do your Profit and Loss statements show that your business is loss-making? Need access to urgent capital support? Apply for Working Capital Finance or learn more about how your business could benefit.

What does a Profit and Loss Account show?

Profitability. Profit and Loss accounts are designed with the sole purpose of helping you keep track of how much money is entering and leaving your business. Ideally, you want your business to be taking more than what it’s spending, giving you a Positive Profit Margin. However, running a business is never that simple and the amount of money being earned, month on month, can vary.

But as well as clearly showing whether you’re making a Net Profit or not, such accounts may also prove helpful in indicating your strongest/weakest trading months, any overspending and predicting if you’re likely to struggle to meet creditor demands. As such, this gives you additional insight into your business’ performance, enabling you to predict pitfalls and take action sooner before any lasting damage occurs.

How do I calculate my business’ Net Profit?

The health of your business relies on your ability to generate a profit at the end of each month. In order to ascertain whether this responsibility is being fulfilled, calculating your business’ Net Profits is vital. This is achieved by taking into account your:

  • Total Income and Turnover - e.g. product/service sales, subscriptions, customer fee payments, etc.
  • Total Operating Expenses - e.g. staff wages, supply costs, utility bills, insurance, purchases, repairs, etc.

Once you’ve gathered all the relevant figures, you can use to the following formula:

Net Profit = Total Income - Total Operating Expenses

Naturally, what you’re aiming for is a situation where your business is earning more than it’s spending. But if this isn’t the case, it may well mean that your business is loss-making which requires urgent action. Fortunately, there are a number of ways in which this can be addressed.

How can I support my business?

As well as revising spending and avoiding any unnecessary expenses, you also need to check whether your business is generating a sufficient amount of revenue. However, ensuring your earnings isn’t easy and can be affected by any number of factors, including customer trends, late payments, local economy or even seasonal trading periods. But rather than let your business suffer and risk insolvency in the future, you can offer your business the support it needs by applying for Working Capital Finance. Depending on the product and the complexity of the request, you could be approved in as little as 48 hours and receive funding through products such as Merchant Cash Advance, Invoice Finance, Overdraft Replacement or Asset Refinance.

Need help supporting your business?

Running and maintaining a business is a full-time responsibility, but in order to achieve your vision and long lasting prosperity, regularly monitoring your Profit and Loss Accounts is crucial. This is because if your business has become loss-making you need to know about it and be able to address the issues responsible as soon as possible, which is where applying for Working Capital Finance could help, providing you know which product is most suitable for your business’ needs.

At Rangewell, we’re an Access to Finance specialist working with over 350 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use for business owners and their advisors, plus we’ll guide you through the application process. So if your Profit and Loss statements show that your business is loss-making and needs urgent support, apply for Working Capital Finance today or find out more with Rangewell.

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