Understanding your profit and loss statement

Your profit and loss statement (P&L) helps you understand your business performance and profitability over time. It’s sometimes called an Income statement and its main purpose is to list income and expenditure.

Whereas a balance sheet is a snapshot in time, the P&L shows transactions over a specific period of time. This can be a month, quarter, financial year or any other period, and it can be a stand-alone report or a comparative period report.

Together with the balance sheet, these two reports provide a comprehensive understanding of the financial position and performance of a business.

The profit and loss statement has two main sections: income and expenses.

These may be further subdivided depending on the complexity of the business and reporting requirements.

Income or Revenue

Income primarily includes main business activities such as sale of goods or services. Other income such as interest received, capital gains or income from secondary business activities is also reported.

Expenses

Expenses are usually divided into two sections: direct costs, or cost of goods sold, and expenses. Cost of goods are those that are directly linked to the provision of services or sale of goods. For example, if you buy widgets from a wholesaler and sell them at a marked-up value, the cost of the widgets is a direct cost, not an overhead expense.

Other types of direct costs might be importing and freight costs, contractor costs or certain equipment. Some direct costs are fixed, that is, they are the same from month to month, or they could be a fixed percentage of sales; others vary in value but are still related to the income producing activities.

Overhead expenses are all the other expenses required to run the business, regardless of the level of income: for example, rent, utilities, bank fees, bookkeeping fees, professional development costs, vehicle costs and staff costs. Many of these costs form the basis of working out your break-even point, or how much it costs just to open the doors for business.

There are some expenses which may be reported as a direct cost in one business but an indirect cost in another type of business, for example, merchant fees or contractor costs.

The Bottom Line

Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line’. Often business owners are just interested in looking at the bottom line, but a true financial picture requires an understanding of several reports and an ability to see the big picture that the reports are illustrating.

The P&L is a vital tool to analyse for trends over time

• What does your P&L tell you about relationships and ratios between sales and expenses, seasonal changes and annual trends?
• Have all your direct costs been allocated correctly?
• Have you recouped all billable expenses from customers?

Financial statements help you understand the big picture for your business. With deeper understanding of your business operations and performance you can make informed decisions about your business finances.

We can help you.

Are you confident in reading your profit and loss statement? Would you like to know more about the relationship between costs and revenue to make better business decisions? Contact us today to examine your financial reports with an experienced business advisor.

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Are you playing in the growth game?

What’s your business growth looking like and where were you 12 months ago compared to today?

If you haven’t given it much thought it is probably because you’re always stuck in the day-to-day operations. But it is worth spending some dedicated time to do some reflecting and planning.

Growth doesn’t need to mean more risk, more hours and more headaches. To be successful, you first need to identify where the opportunities for growth are in your business and industry. Then establish what you and your team are going to have to do in order to maximise these opportunities – and navigate the likely obstacles you’re going to have to climb over.

Here are a couple of tips to get you thinking about growth:

Do an audit to document your growth over time

Analyse all the information you have to understand how you got to where you are right now. This will help you to plan for future growth.

Put a one page plan together

Include the big objectives and what you’ll realistically need to do in order to achieve them. (identify the tasks and people)

Establish some key performance indicators

Keep the momentum up and visit these regularly to ensure you’re on track.

As a business owner, it’s really tempting to try and do it alone, but you can get bogged down in the demands of day-to-day business. The truth is that you need to take time out of the business to get some much needed perspective. We can help build your business plan and identify the steps you’ll need to achieve it.

Business growth can be perceived as something scary, but when you have a plan and it’s done right, it can be empowering and rewarding.

With a bit of planning, the right systems, people and resources, there is tremendous opportunity to grow and scale your business to the next level to hit your growth targets.

We can help you get started.

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Regain control of your business

Not all business owners want to grow their business. Some may just want more control. After all, your business is there to serve you; you shouldn’t be a slave to it. So, how do you regain that much needed control?

There are three essential tools all businesses must have:

1. An annual Business Plan.
2. An annual forecast.
3. Ongoing reporting and accountability.

The annual Business Plan​

Your Business Plan shouldn’t be a lengthy document living in a dusty drawer. It should be on one page and displayed somewhere highly visible so you can review it regularly.

Best developed using an independent facilitator, your Business Plan should articulate exactly what you want from your business; the hours you want to work, the holidays you want to take, and the income you need.

You’ll identify Key Performance Indicators (KPIs) to monitor, vulnerabilities to manage, and opportunities to act upon. You’ll set no more than four key goals for the year, breaking these down into quarterly goals with clear actions to complete in order to achieve them.

The annual forecast

Your forecast will record how cash must flow throughout the year to give you what you want from your business. Too often business owners only create a forecast because the bank has requested one.

The forecast will highlight your business's weaknesses, when cashflow problems might arise, and how you need to manage your business financially to achieve the goals in your Business Plan. Don’t wait for your bank to request a forecast; it’s an essential tool to ensure the success of your business every year.

Ongoing reporting and accountability

The value lies in the implementation of your Business Plan and annual forecast. Constantly reviewing your progress against your targets is crucial. Ongoing reporting allows you to track actual results against your forecast to ensure progress towards your goals.

The best way to ensure you don’t fail to implement the plan is to be held accountable by someone independent. Every business owner needs a coach. A great coach will work with you to get a result better than you could achieve on your own. They’ll uncover the root causes of problems in your business and empower you to do better. Most importantly, they’ll hold you accountable to getting the important stuff done.

There are no magic bullets to business success. All businesses need these three tools.

Get in touch to discuss how we can work together - to help you regain control of your business.

“Dreams x Goals x Plans x Actions = Your success” - Brad Sugars

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Be, Do, Have

Our success in life depends largely on our mindset. Those who wait until conditions are perfect are unlikely to achieve their goals as they’re always waiting for the right time and never take that first step.

There are three small words whose order can heavily influence the outcomes we achieve: be, do, and have.

After deciding on your goals, the next step is to consider who you need to be in order to achieve your goals, rather than what you need to do.

Compare the following sentences:

“When I have a more profitable business, I’ll do great things with my family and be a great partner and parent… first I need to work a bit harder to sort out my business and finish these projects, then everything will fall into place.”

“In order to be a great partner and parent, I need to work smarter so I can have more time with my family.”

Now, if this resonates with you, how can you work smarter?

When you focus on who you need to be first, you’ll start to prioritise doing things in a way which is consistent with that role. The things you’ll have as a result become the bi-product of who you are. In contrast, if we wait to achieve what we think we must have in order to be a better person, we risk never changing our habits.

So, who do you really want to be?

Start being that person today. Think like that person, speak like that person, and act like that person.

Let the be drive what you do from now on. You’ll be amazed at how quickly you’ll get what you want (the have).

Do you need perspective on how you can work smarter? We can help!

“You’ve got to be before you can do, and do before you can have.” - Zig Ziglar

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Looking after yourself as a small business owner?

As a small business owner, do you find looking after yourself a challenge?

Owning and working in a small business can eat up all your spare time. Exercise or time for yourself is often the first thing that is abandoned to fit in the many other things you have to do in a day. And while many of us finish the year with lofty goals for exercise in the new year, these lofty goals can be hard to achieve.

Is this you?

Here’s an idea… 

Instead of setting goals that are vague and big, set smaller more specific goals that are much easier to achieve.

Make a point of getting outside every single day and getting ‘a little’ exercise. It doesn’t have to be a gym membership, a bootcamp or going running.

Even just a walk around the block will be a step in the right direction!

A study in the journal Preventive Medicine found that just by minimising sedentary activities, and replacing some of them with light-intensity activities can achieve benefits for your health.

Easy actions

So start small and stick to it. Soon you’ll be benefiting from the short time away from work, more time to think, and the fresh air.

For a healthy lifestyle, the adult recommendation is at least 30 minutes of moderate physical activity on five or more days per week. This will not only increase your quality of life but also your sense of wellbeing.

Developing great leadership to scale your business

There are several aspects of successfully scaling up your business one being having comprehensive systems. Another being developing great leadership.

Have you heard the quote,

“What got you here won’t get you there”?

These are wise words (and the title of a book we encourage you to read!) are from Marshall Goldsmith.

When choosing to scale your business many leaders focus on their systems and teams, which is important. But you should also focus on scaling yourself.

Developing great leadership

Most reasons why businesses fail, directly and indirectly, point to leadership failure.

From poor planning to poor hiring, poor communication to poor process, poor capacity to poor execution - most things can be fixed with great leadership.

Scaling the business will make new demands on a leader’s time and attention. And it’s critical that these are both focused on the right things:

1. Planning

Setting a clear vision and relevant business goals. Having a regularly reviewing progress. And resetting goals to drive performance improvement.

2. Inspiring

Motivating others to achieve more than before. Showing them their potential to make an impact.

3. Empowering

Enabling your team to find their own solutions by guiding them with your support, trust and encouragement.

4. Culture

Demonstrating allegiance to your team and standing for the business’s core values.

5. Innovating

Continuous improvement in people, product, and process.

6. Personal growth

Developing and supporting your future leaders with mentoring and guidance.

Great leadership is about influencing others in the direction of a common goal.

While there can only be one leader of a business, there are different areas that need individual leaders. People can lead multiple areas initially. But, as the business grows, look to empower others. Delegate the leadership of some areas to ‘leaders in training’.

On a scale from 1 to 10, how well do you rate your performance on the above six categories?

Where can you scale your leadership?

If you need help? Get in touch.

“The function of leadership is to produce more leaders, not more followers.” - Ralph Nader

Use the Fresh Start Effect to achieve positive change

Have you heard of the Fresh Start Effect?

Around the world, people usually start each new year by setting goals and making positive changes. 

The reason that the new year can be such a great time to make changes is that the date provides a clear ‘temporal landmark’. Temporal landmarks give us an opportunity to step back, survey our lives and figure out what things we’d like to tweak.

At new year, we set goals to harness the energy of a resolution and create what’s known as the Fresh Start Effect.

It is important, however, to make sure that you understand what you’re trying to achieve, and create goals that are more likely to succeed.

Making changes or starting something new is easier with these techniques:

Making a public commitment

Announce your new goal on social media. If your friends and family get behind your goal, you’re more likely to be accountable and more likely to succeed.

Join a group

If you want to pick up a sport, start a new hobby, or pick give something up, consider joining a group. Again, this is a great way to create accountability. If you’re worried about letting down other people, you’re more likely to commit or show up!

Be specific

When you’re setting goals, be exact. If you want to make your business more efficient, know what this means in practice. For example, implementing the right apps to help automate some of your core processes requires research about what is going to suit your business the most. Set your goal with dates and times in mind about what you're going to research and when. And put them into your calendar.

Talk to us about automation

If your Fresh Start for 2020 involves implementing automation, talk to us. We can review you business processes and identify the automation opportunities, helping you choose the best apps to drive your business efficiently.

Contact us here.