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How to understand a P&L report?

 

 

A lot of us find numbers boring and mundane and not something we want to talk about. There are many more interesting subjects, especially when it comes to your business. But this is one of the most important things for you to get on top of if you want to ensure you are making a profit month to month.  

 

The Small Business Association says that over 50% of businesses fail in the first five years. They have gotten through the first tricky years, but as they start to grow and scale-up they then fail. If you have a good understanding of your profit and losses this is less likely to happen. Plus if you want to grow past 1m turnover you have to know your stuff about your numbers.  

 

So in this article we will look at two important questions:  

  1. 1.What is a Profit and Loss report?  
  2. 2.What are the key figures you need to be looking at? 

 

What a lot of people do is make the mistake of relying on a yearly meeting with their accountant. You have to know at any point in time how your business is looking, if you wait for the meeting it could be too long and you could be bleeding money. If you are on top of your Profit and Loss report then you can start to notice danger signs sooner, for example the cost of products increasing or traders prices going up. You will also be able to understand overheads, for example the rent on an office and van insurance that you have to pay off first before making a profit. You also need to know what tax you need to set aside each month so you don’t end up with a surprise at the end of the year. As you are scaling up this is when your cash flow will be tight, but you can still be profitable and this report will help you to see how that is.  

 

If you are a business owner and are not looking at your P&L report you are like a blindfolded captain of a ship that is headed for the rocks. You can’t see if you are navigating well or if you are about to be sunk. When you hit that rock it will be sudden and unexpected and when you hit it you won’t survive.  

 

So what does the report look like? 

 

In your accounting software download your Profit and Loss report for last month. There you will see five key numbers: 

 

  • Turnover – This is simply the total amount of invoices your work you bill for. Maybe you have more than one product or service, but it will combine into one number that you generate each month. 
  • Cost of sales – how much was spent on materials and labour. Costs for things like equipment hire, council fees, labourer wages.  
  • Gross profit – This is not what you take home, it is just the difference between the turnover and cost of sales. It’s very helpful to keep track of this in a percentage and use it to set targets. Bigger companies will have a lower percentage than a smaller company, but between 20-30% would be healthy.   
  • Administrative costs- fixed overheads, insurances, rent, electricity and gas, leases, fixed salaries. Some things are paid annually and can be divided by 12 to see how it divides out every month.  
  • Operating profit – what you are left with at the end of the month for tax and in your pocket. Remember that you still need to take tax out of this figure, when that is taken out you are left with what you take home.  

 

If you haven’t done it before it’s worth doing today to download and go through it. Once you are doing this, you can then interpret and set targets. It’s not a coincidence that the most wealthy people in the world love their numbers. Warren Buffett, one of the richest people in the world, is absolutely numbers obsessed. As an investor, he pores over the numbers, and his understanding of these reports have allowed him to invest in the right companies. We are not in the same business, but we can learn from him. Even if you don’t love maths I encourage you to learn the basics and you will then be able to start manipulating your profit.  

 

If you would like more help with best business practice, marketing, operations, finance, best software & apps, how to find & keep the best staff etc; then come over and listen to the Develop Your Construction Business Podcast herehttps://podcasts.apple.com/gb/podcast/develop-your-construction-business-podcast/id1564082706 

 

 


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