The most common statement I hear from SME business owners is “I am not sure if I have the right Profit and Loss Statement for my business”.
All too often we use the standard Profit and Loss report that is generated from our accounting system or provided to us by our accountant. But there are many ways to present an entity Profit or Loss report. There are also many different purposes they are used for – e.g., for tax purposes, understanding your business performance, attracting investors…just to name a few.
So, the question is:
Is your monthly Profit and Loss Report giving you the insight you need to run your business?
If not, now is the time to change it.
With all the challenges in the last 18 months (Covid lockdowns, recessions, hiring staff) and all the challenges ahead (inflation, hiring staff, competition) you need good business insights now.
Your Profit and Loss report is the primary tool for providing you with business insight.
I believe the most important rule is each sub section within the Profit and Loss report should provide you with some meaningful information as the business owner. If it does not – then it is no use to you. Your Profit and Loss needs to be more than just a column of numbers.
Your Profit and Loss needs to be more than just a column of numbers.
You don’t have to start with a blank sheet of paper…unless you want too…
Unless you are a large company there are no hard and fast rules defining the Profit and Loss format. The basics must be there – Revenue, Costs, Profit or Loss. But beyond that you can develop a format which works for you. You might like to think about…
# Revenue and Gross Margin
Do you want to see all your revenue together, followed by the direct costs of earning that revenue (Cost of Goods Sold)? Then the gross margin?
Or do you want to see revenue and costs for each product. Then a margin on each product.
The table below gives you a few ideas. Let your need for insight drive how you want to see the numbers reported.
# Cost of Goods Sold (Direct Costs)
These are normally costs directly associated with earning the revenue. Often, they will vary depending on how much revenue has been earned. Subtracting these from Revenue will give you a Gross Margin.
The question many Business Owners ask me is – “should I include my people costs in Cost of Good Sold? Then I could get a better idea of my margins.” Strictly speaking the answer is no. However, I believe it depends on the type of business you are in and what you want to measure. For consultancy companies, software firms, enterprises with contractors or commissions and many others it might be useful to include some payroll costs as part of Cost of Goods Sold. Often in these businesses what is useful is to understand what money is left over after you have paid employees – as this is key for understanding owner profit potential.
# Operating Costs
Generally, the approach is one long list of all operating costs, and often in alphabetical order. Useful if you want to run your eye down and find ‘cleaning’ vs ‘software maintenance’ but otherwise not that insightful.
Think about the meaningful and logical groupings that help you understand the cost of running your business. For example – ‘travel costs’, ‘marketing and advertising’, ‘personnel costs’, ‘property/office costs’.
For some clients I like to split out the non-cash costs such as depreciation and annual leave accruals. That makes it easy to see the underlying cash result at a quick glance.
Remember – each sub section within the Profit and Loss report should provide you with some meaningful information as the business owner. Write down what information you want to understand – that will help you define how you want your report to look.
# Talk to Your Accountant
Once you have an idea of what information you want from your profit and loss
- Talk to your accountant about changing the format.
- Get your software partner to design a new format for you.
- Consider a reporting tool which allows you to import information from your accounting software and design a report for yourself.
Here are a few software reporting tool options.
Xero: https://apps.xero.com/nz/function/reporting
MYOB: https://www.myob.com/nz/apps/category/tasks?category=advanced-reporting
Even if you don’t use Xero or MYOB, you will find many of these reporting tools link to other accounting software.
It is a good idea to keep the more traditional Profit and Loss statement from your accounting system or provided by your accountant – that is probably the one which is useful for the bank and the Inland Revenue.
Remember The Wrong Profit and Loss format is more than a risk…it is a liability.
Remember The Wrong Profit and Loss format is more than a risk…it is a liability.
For more suggestions about Profit and Loss Reporting – or for help with other business challenges – contact Fiona Harnett at MacGregor Jamee to arrange a needs assessment.
MacGregor Jamee helps SME owners increase revenue, reduce costs, and improve operational efficiency.
We do this by providing them with the sort of high calibre chief financial officer, business mentoring, leadership coaching and business consultancy services often only available to large corporates.
To arrange your free assessment contact Fiona Harnett on 021 477 671 or [email protected].
Or visit https://macgregorjamee.co.nz/
For more insights follow our regular posts on LinkedIn