Business owners consider the profit and loss report important because it is one of the reports that can determine which direction the business is going. Numbers reflecting on these reports must be interpreted correctly and accurately as there should be no room for mistakes. The bookkeepers will be the one to make some recommendations based on the reports. When a business is losing or making money, a Profit and Loss Report will be a determining factor.
Unfortunately, not all business owners understand the importance of these reports until their business fails. Since interpreting numbers of the second nature of every bookkeeper, it is no longer surprising that they know how to read the profit and loss report.
However, not all business owners can interpret or read a profit and loss report. Some may assume that everything is going in the right direction, but when the report is interpreted, the business is losing money, which is not a good sign of progress. There are various areas of profit and loss report that need more than just a simple interpretation and seeing the numbers go up is not enough.
Net Profit or Net Loss
When the figure shown in the report is positive, it only means that the business is making a profit. A negative figure means that a business loses money. The net profit or net loss provides information of the total of income, less cost of goods sold or purchases less expenses.
The expenses provide the figures for business expenses including the cost of goods sold. The expenses also show the categories based on your industry. It also includes the operating expenses such as power, telephone, rent and many more.
The Income shows the total of invoices or sales, which you have invoiced over a certain period of time. The Income does not yet include the investment income because this only falls under a section referred to as ‘other income’. This category is found on the bottom of the report. The business’ income is also called ‘turnover’.
The Gross Profit refers to the incomes less purchases and the Cost of Goods Sold. It is important that a business owner understands the markup percentages and this is what the gross profit provides. The markup percentages are expressed as a percentage of income.
Cost of Purchases or Goods Sold
The Cost of and Goods Sold are the total of all the expenses that the business has incurred. The expenses are the ones that have contributed to the income of your business. The purchases refer to the inventory items that the company has sold and purchased. The items for sale such as the freight charges are the Cost of Goods Sold.
It is not only the bookkeeper that should be mindful of the figures on the profit and loss report because business owners must also understand these reports. When business owners know how to interpret these reports, it is easy to determine when and how changes can be made if something is not working with regard to the financial aspect of a business.