Profit and Loss Statement: How Much Does Your Business Earn - How To Draw It Correctly?
Every businessman wants to know and manage his profits. A tool called the profit and loss statement (P&L) helps to calculate it correctly. We tell you what it is, why you need it, how it's designed, how to keep it, and how to use it.
What is a P&L statement.
The profit and loss statement (P&L) is a table that shows a business's revenues and the expenses it incurred to make them. The difference between the two is a profit or, if negative, a loss.
To bake a meat pie, we need to buy flour, milk, eggs for the dough, meat and spices for the filling, rent a shop, pay for utilities, pay the baker's salary, and so on. All of these are operating expenses that we must report in the OP&E. The money we receive from the sale of pies, we also enter in the OPU. Then we subtract the expenses and see what we get.
Additionally, ITPO shows the key performance indicators of the business as a whole and its individual segments, if there are several of them.
How is the KPIU arranged?
The top line of ITPO is the revenue. This is the amount of obligations performed to the client. The work performed is recognized as revenue, and it doesn't matter if the client transferred the money or not. Expenses are recognized taking into account the connection with the revenue. And then comes everything that we deduct from the revenue.
The next block is direct variable costs. You can relate them exactly to revenue. If there is no revenue, then there is no expense. Direct variable costs include the cost of production, transportation costs to deliver goods, and the like. Then we subtract the direct variable costs from the revenue and get an intermediate figure called marginal revenue. It demonstrates how efficiently sales are working.
The next block is direct fixed (general production) costs. These costs appear with the appearance of revenue, but do not grow with it. For example, the salary of production personnel.
Subtracting the sum of direct fixed and variable costs or general production costs from the marginal revenue, we get the gross profit. This indicator allows us to evaluate the effectiveness of projects or lines of business. If we have several lines of business or projects, by comparing gross profit, we can see which lines of business are more efficient and which projects are more profitable.
Gross profit is followed by indirect costs. These costs relate to the company as a whole; they cannot be correlated to a specific contract or product output. For example, office rent, software and internet costs.
Subtracting indirect costs from gross profit, or the sum of all costs from revenue, we get operating profit (EBITDA). This intermediate indicator, allows us to evaluate business performance and compare companies within an industry. EBITDA demonstrates whether a business is able to make money.
With EBITDA, we reach the finish line. It remains to subtract taxes, interest on loans, and depreciation to get the indicator for which we are running this report: net profit.
Net profit is the final result of the company's work. This money can be spent on business development, dividend payments, creation and accumulation of a reserve fund, and bonuses to employees.
With the help of OP&E, the owner manages profits by analyzing what can be done to increase them, evaluating expenses for efficiency, and so on. When a business has several directions, OPM allows to compare how effective they are and identify those that eat up the overall profit. Therefore, when a business has several directions, the profit is counted for each. This allows their efficiency to be evaluated. If at least one direction is unprofitable, because of it the owners lose part of the profit that the others bring. Knowing the result of each direction, we identify in time those that are pulling at the bottom. And they get a reason to think about what to do with them: is it possible to bring them to profit or is it easier to close them.