There’s something I pride myself on above all else…
And that is bringing clarity to small business owners!
“Scary Accountant Speak”, well I don’t think there’s anyone out there that actually “likes” talking to Accountants about Accounts…
The weather? Tick!
Dogs? Tick!
Cats? Tick!
Kids? Tick!
But Accounts… there’s a topic that has even Iron Maiden running to the hills!
So today we’re going to talk plainly about Profit….and Loss… and a story about dogs!
The Profit & Loss (or P&L for short) is a summary of all incomes and expenses for an accounting period.
Income minus expenses is calculated to give a Profit or Loss number.
We use the P&L to calculate the tax you owe to HMRC, but it can also help work out what your business is actually doing…
Which is a kinda cool and unexpected little bonus for you!
So…
How much does it cost to make a sale?
How much income is my advertising spend generating?
“How much revenue is my advertising campaign generating per £1 of expense?!”
It’s important to understand your P&L as it will help you understand where you can reduce expenditure to increase your gross or net profit.
OR
Where you can INCREASE expenditure (such as advertising) in order to INCREASE revenue.
And here’s my token Dog story…
I was playing in the local park with our son Xander and he loves doggies! So much so that he is a regular drill sergeant with the doggies of the park for the catching of sticks… which he throws, of course!
On one particular occasion the weather was turning and the sky was growing quite angry looking. I felt we needed to get our skates on to get back home before the deluge!
But Xander had other plans… he had taken up his regular sojourn of stick throwing with 2 particular doggies who were having a whale of a time catching his airborne sticks!
The more he threw, the more excited they got.
And why do you think that was?
Easy! It’s because when someone (or a dog) gets a positive response from something, they want more of it… more and more and more.
And that’s exactly what YOU want in your Business – more results from the activities that actually DO generate you profit in order to increase your wealth, health and happiness!
It’s a simple science really!!
This is the precise way we work that out!
Example of a very Basic P&L below
| £ | ||
| Sales | 1000 | |
| Cost of Sales | ||
| Purchases | 500 | |
| Carriage Inwards | 100 | |
| Gross Profit | 400 | |
| Overheads | ||
| Staff Costs | 50 | |
| Energy Costs | 50 | |
| Premises | 50 | |
| Net Profit | 250 |
Sales: Your income for an accounting period.
Purchases: These are goods bought for resale or the raw materials it took to make the item you sold.
Carriage Inwards: Delivery costs on items that are bought for resale (direct cost / cost of goods sold)
Gross Profit: This is the sales minus the direct costs.
Overheads: Overheads are indirect costs (not directly associated with the cost of sales).
Net Profit: This is the gross profit minus the overheads.
Your tax liability is calculated using this information fo’ sure…
BUT we also have allowable expenses to consider…
and that…
Well that’s a post for another time!
Still a little confused?
Honestly, whilst I’ve done my level best here to break it down, it’s still a frog in a bag and no one would blame you.
Throw me a bell and let’s chat about what this means for YOUR Business!
No Comments