The Profit and Loss Account is another one
of the key financial statements in your business. It shows the financial performance of your
business over a specific period – usually 12 months. It’s also used by HM Revenue and Customs to
check your calculations for tax and NI contributions. I’m going to give you a quick overview of
a Profit and Loss Account so that you get a basic understanding of what it includes.
It may be easier if you download ‘Profit and Loss Account at a glance’ and follow it through
with me. OK, let’s see what a P and L is all about,
shall we? The first line is the total sales. This includes
sales that you have invoiced even if you have not yet been paid. Next, is Cost of Sales. This is the total
costs that you have incurred in order to produce these sales. It’s likely to include materials,
labour and overheads. Now the first calculation – Gross Profit.
This is Total sales minus cost of sales. In our example that’s £20,000 minus £5,000
making a Gross Profit of £15,000. Now we move on to the Fixed costs and overheads.
In our example, this is £10,000. Finally we come to the Net Profit. This is
the Gross Profit minus all the business expenses. This doesn’t include drawings though.
In our example, the Net Profit is £5,000. The Net Profit is also called the bottom line.
If the bottom line is positive, you have made a profit. If it’s negative, you have made
a loss in that period. So that’s what a Profit and Loss Account is
all about. It’s an important statement for giving information
about your business. But remember, the profit you see here is “on paper” – it is for accounting
purposes. Cash is what is important for running the business and you need your cashflow forecast