Profit and what?

What is a profit & loss report? Why do I need one? What does it tell me?

A profit and loss report is likely the most important report to your business on a day to day basis, you may be sent a copy by your accountant, or your accounts software may produce one for you, but what is it?

Very simply, a profit and loss report tells you whether your business has made a profit, or a loss, over a period, most businesses look at thier profit and loss for the current month, and current year, and will compare to previous years. 

The report is broken down into various categories, but typically you will have

Income - from sales or services, or however your business makes its money. Any grants that you receive would also be included as income.

Cost of Sales or Direct Costs – what it costs you to make those sales, for example products that you buy to resell, or stock you use to make a product before you sell it on.

Overheads – all your other costs, for example web hosting, rent, telephone cost, printing. These costs are all allowable business expenses, but they couldn’t be attributed to any particular sale, you will still have them regardless of whether you are making sales or not.

All 3 of these are variable figures, you, as a business owner can change them, but you need to understand how they interact, which brings us on to PROFIT.

Gross Profit vs Net profit

Profit is profit right? Well yes but…

Gross profit is your income minus your cost of sales. It tells you whether you are making a profit on what you are selling vs what it cost you to buy/make those sales. It’s an important figure. If your gross profit is low, or worse a loss, you need to look very carefully at your sale price and purchasing costs. In the example below. The total income was £23706, and the cost of sales was £4185, leaving a Gross profit of £19521. 

It’s very possible to have a fantastic Gross profit, but still make a loss if your overheads are too high. Which brings us onto Net profit.

Net Profit is your income minus cost of sales minus overheads. This figure is your “bottom line” it tells you exactly how much profit you have made, and how much you will be taxed on. If you have a strong gross profit, but your net profit is low (or a loss), you need to consider your overheads and if any can be reduced.

In our example below, overheads are £11702, leaving a net profit of just £7819, you can see how quicky overheads can eat up your profits if you don’t watch them carefully.

Its important to look at and understand your profit and loss report regularly. It’s a mini health check for your business and will help you spot problems before they become insurmountable.

Profit And Loss Account
For the year ended 5 April 2021
				2021
				£
Income		Grants	4,246
		Sales	19,460
				23,706
Cost of sales		Cost of goods sold	3,912
		Merchant Fees	273
				4,185
Gross profit				19,521
Expenses		Accountants fees	250
		Printing	29
		Insurance - professional indemnity	120
		Stationery and printing	50
		Mileage	556
		Telephone & internet	235
		Rent	6000
		Advertising	4222
		Webhosting	240
				11702
Net profit				7,819