Here’s what your Profit and Loss Statement is trying to tell you
Understanding your business's financial health is essential for success, and the Statement of Financial Performance, often known as the Profit and Loss account, is a great place to start. Typically presented in two sections, this statement helps demystify your business's income and expenses. Let’s break it down for you.
The two parts of your P&L
The top section of your statement reveals all sources of income your business has received over a specific period, like a quarter or financial year. By subtracting the cost of goods sold, it provides your gross profit figure.
The bottom section outlines the fixed running costs—overheads like rent, utilities, and communications—that you must pay regardless of sales levels. Subtracting these from the gross profit results in your net profit figure before tax.
Measuring Business Performance
These figures allow you to calculate two critical Key Performance Indicators (KPIs): your gross profit margin and net profit margin. These KPIs offer valuable insights into your business performance.
Gross Profit Margin: This is your gross profit as a percentage of sales and gives you a clear view of how well your business is managing production costs. Divide your gross profit by total sales and multiply by 100 to get the percentage. For example, if your gross profit is $80,000 on sales of $400,000, your gross profit margin is 20%. This percentage allows you to compare your performance with previous periods and similar businesses, regardless of size. Affinity Accountants Wellington can help you find the average gross profit percentage for your industry, setting a benchmark for performance.
Net Profit Margin: This KPI shows your business's profitability after overheads are deducted from gross profit. Using a similar calculation, if your net profit is $60,000 on $300,000 in sales, your net profit margin is 20%. Monitoring this margin helps you identify trends, such as rising costs without increased sales, and take corrective action.
Practical Tips for Improvement
Benchmark and Set Goals: Use your KPIs as benchmarks to set improvement goals. Aim to outperform both your past results and the industry average. Our accountants in Wellington can provide insights to help you set realistic targets.
Frequent Financial Reviews: Don’t rely solely on annual statements. Regularly update your financial data using your accounting software to generate monthly or quarterly reports. This timely information allows for quick corrective actions to address negative trends.
Professional Guidance: Understanding financial trends can be complex. Affinity Accountants in Wellington are here to help interpret your financial data and guide your business in the right direction.
For small business owners, mastering these financial tools can turn potential pitfalls into opportunities for growth. If you need assistance in interpreting your financial statements or setting strategic goals, Affinity Accounting is here to support your journey. Let's have a conversation about how we can help your business thrive.
Contact us for advice specific to your situation.
Affinity Accounting is a team of Wellington Accountants who love to help small businesses realise their potential.
What our clients say
“We started with Affinity Accounting in April - moved from MYOB to Xero and after reviewing our accounts Affinity Accounting were able to point out where we could claim deductions we weren't currently claiming. Dylan is really helpful and timely with emails and replies. Highly recommend.”
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